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HomeMy WebLinkAbout2011TOWN OF SOUTHOLD SINGLE AUDIT REPORTS Year ended December 31,2011 FINANCIAL SECTION Independent Auditors' Report .................................................................................................................... 1-2 REQUIRED SUPPLEMENTARY INFORMATION Management's Discussion and Analysis ................................................................................................... 3-14 BASIC FINANCIAL STATEMENTS Government-Wide Financial Statements Statement of Net Assets ......................................................................................................................... Statement of Activities ............................................................................................................................ 15 16 Fund Financial Statements Governmental Fund Financial Statements Balance Sheet and Reconciliation of the Governmental Funds Balance Sheet to the Statement of Net Assets ............................................................................................................. 17-18 Statement of Revenues, Expenditures, and Changes in Fund Balances and Reconciliation of the Governmental Funds Statement of Revenues, Expenditures, and Changes in Fund Balances to the Statement of Activities ........................................................ 19-20 Fiduciary Fund Financial Statements Statement of Fiduciary Net Assets ......................................................................................................... 21 Notes to Financial Statements .................................................................................................................. 22-45 REQUIRED SUPPLEMENTARY INFORMATION OTHER THAN MANAGEMENT DISCUSSION AND ANALYSIS Schedule of Revenues, Expenditures and Changes in Fund Balance - Budget and Actual General Fund ....................................................................................................................................... 46 Highway Fund ...................................................................................................................................... 47 Community Preservation Fund ....................................................................................... 48 Postemptoyment Benefits Healthcare Costs - Schedule of Funding Progress ................................ 49 OTHER SUPPLEMENTARY INFORMATION Combining Fund Statements: Non-major Governmental Funds Combining Balance Sheet ................................................................................................................... Combining Statement of Revenues, Expenditures, and Changes in Fund Balances ........................ DISCRETELY PRESENTED COMPONENT UNITS 50 51 Discretely Presented Component Units: Combining Statement of Net Assets ...................................................................................................... 52 Combining Statement of Activities .......................................................................................................... 53 OTHER REPORTS Schedule of Expenditures of Federal Awards ................................................................................... Notes to Schedule of Expenditures of Federal Awards .................................................................... Report on Internal Control Over Financial Reporting and on Compliance and Other Matters Based on an Audit of Financial Statements Performed in Accordance with Government Auditing Standards ....................................................................................................... Independent Auditors' Report on Compliance with Requirements That Could Have a Direct and Material Effect on Each Major Program and on Internal Control Over Compliance in Accordance with OMB Circular A-133 .............................................................. Schedule of Findings and Questioned Costs .................................................................................... 54-55 56 57-58 59-60 61-66 CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT Honorable Supervisor and Town Board Town of Southold Southold, New York We have audited the accompanying financial statements of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Town of Southold, New York, as of and for the year ended December 31, 2011, which collectively comprise the Town's basic financial statements as listed in the table of contents. These financial statements are the responsibility of the Town of Southold, New York's management. Our responsibility is to express opinions on these financial statements based on our audit. We did not audit the financial statements of the seven component units presented discretely in these financial statements. The financial statements of the Fishers Island Ferry District and the Fishers Island Waste Management District, which represents 79.9%, 76.8%, and 79.1%, respectively, of the assets, net assets, and revenues of the aggregate discretely presented component units were audited by other auditors whose report thereon have been furnished to us and in our opinion, insofar as it relates to the amounts included for those two component units, are based solely on the reports of other auditors. Except as discussed in the following paragraph, we conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinions. The financial statements of the other discretely presented component units, which represents 20.1%, 23.2%, and 20.9%, respectively, of the assets, net assets, and revenues of the aggregate discretely presented component units were not audited as of the report date, nor were we able to satisfy ourselves as to those financial activities by other auditing procedures. In our opinion, except for the effects of such adjustments, if any, as might be determined necessary had those discretely presented component units been audited, the financial statements referred to above present fairly, in all material respects, the respective financial position of the governmental activities, the aggregate discretely presented component units, each major fund, and the aggregate remaining fund information of the Town of Southold, New York, as of December 31, 2011, and the respective changes in financial position for the year then ended in conformity with accounting principles generally accepted in the United States of America. As discussed in Note A.7 to the basic financial statements, the Town of Southold, New York adopted the provisions of Governmental Accounting Standards Board (GASB) Statement No. 54, "Fund Balance Reporting and Governmental Fund Type Definitions" as of and for the year ended December 31,2011. PERSONAL SERVICE. TRUSTED ADVICE, · ALBRECHT, VIGGIANQ, ZURECK & COMPANY, PC 245 PARK AVENUE, 24TH FLOOR 25 SUFFOLK COURT NEWYORK, NY 101&7 HAUPPAUGE, NY 11788 3715 T:212.7924075 T:631 434.9500 F:831.4349518 In accordance with Government Auditing Standards, we have also issued our report dated December 4, 2012, on our consideration of the Town of Southold's internal control over financial reporting and on our tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements and other matters. The purpose of that report is to describe the scope of our testing of internal control over financial reporting and compliance and the results of that testing, and not to provide an opinion on the internal control over financial reporting or on compliance. That report is an integral part of an audit performed in accordance with Government Auditing Standards and should be considered in assessing the results of our audit. Accounting principles generally accepted in the United States of America require that the management's discussion and analysis, schedule of funding progress for other postemployment benefits healthcare costs and the budgetary comparison information be presented to supplement the basic financial statements. Such information, although not a part of the basic financial statements, is required by the Governmental Accounting Standards Board, who considers it to be an essential part of financial reporting for placing the basic financial statements in an appropriate operational, economic, or historical context. We have applied certain limited procedures to the required supplementary information in accordance with auditing standards generally accepted in the United States of America, which consisted of inquiries of management about the methods of preparing the information and comparing the information for consistency with management's responses to our inquiries, the basic financial statements, and other knowledge we obtained during our audit of the basic financial statements. We do not express an opinion or provided any assurance on the information because the limited procedures do not provide us with sufficient evidence to express an opinion or provide any assurance. Our audit was conducted for the purpose of forming opinions on the financial statements that collectively comprise the Town of Southold, New York's financial statements as a whole. The combining and individual nonmajor fund financial statements are presented for purposes of additional analysis and are not a required part of the financial statements. The accompanying schedule of expenditures of federal awards is presented for purposes of additional analysis as required by U.S. Office of Management and Budget Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations, and is also not a required part of the financial statements. The combining and individual nonmajor fund financial statements and the schedule of expenditures of federal awards are the responsibility of management and were derived from and related directly to the underlying accounting and other records used to prepare the financial statements. The information has been subjected to the auditing procedures applied in the audit of the financial statements and certain additional procedures, including comparing and reconciling such information directly to the underlying accounting and other records used to prepare the financial statements or the financial statements themselves, and other additional procedures in accordance with auditing standards generally accepted in the United States of America. In our opinion, based on our audit and the report of other auditors, the information is fairly stated in all material respects in relation to the basic financial statements as a whole. Hauppauge, New York December 4, 2012 -2- REQUIRED SUPPLEMENT.ARY INFORMATION Management's Discussion and Analysis TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2011 As management of the Town of Southold, New York (the "Town"), we offer readers of the financial statements this narrative overview and analysis of the financial activities for the year ended December 31, 2011. We encourage readers to consider the information presented here in conjunction with additional information that we have furnished in our letter of transmittal of this report. FINANCIAL HIGHLIGHTS · The assets of the Town exceed its liabilities at the close of 2011 by $100,202,377 (net assets). · The Town's governmental net assets decreased by $1,771,070. The most notable factor contributing to this decrease is the ongoing recognition of postemployment benefits healthcare COSTS. · As of the close of 2011, the Town's governmental funds reported combined ending fund balances of $19,580,506. Of this amount, $854,387 is not in spendable form or is required to remain intact. The remaining of $18,726,119 or approximately 96% of total fund balance is in spendable form with various levels of spending constraint: restricted, assigned, or unassigned making them available for spending at the Town's discretion (in compliance with Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. See Note A.4. · At the end of 2011, the Town's total fund balance for the General Fund was $8,224,732 an increase of $801,631 or 10.8% from the prior year. The assigned and unassigned (GASB Statement No. 54) fund balance for the General Fund was $7,527,752, or 28.5% of total General Fund expenditures and other uses. · The Town's total bonded debt was $42,485,000, and is an increase of 36% from the prior year. OVERVIEW OF THE FINANCIAL STATEMENTS The discussion and analysis is intended to serve as an introduction to the Town's basic financial statements. The Town's basic financial statements comprise components: 1) government-wide financial statements, 2) fund financial statements and 3) notes to basic financial statements. This report also contains supplementary information in addition to the basic financial statements themselves. Government-wide Financial Statements The government-wide financial statements are designed to provide readers with a broad overview of the Town's finances, in a manner similar to a private-sector business. The intent of the government-wide financial statements is to give the reader a long-term view of the Town's financial condition. The Statement of Net Assets presents financial information on all of the Town's assets and liabilities, with the difference between the two reported as net assets. This combines and consolidates the Town's current financial resources with capital assets and long-term obligations. The purpose of this statement is to give the reader an understanding of the Town's total net worth. Over time, increases or decreases in the Town's net assets are one indicator of whether its financial health is improving or deteriorating. You will need to consider other nonfinancia[ factors, however, such as changes in the Town's property tax base and the condition of the Town's buildings, roads, drainage and other assets to assess the overall health of the Town. The Statement of Activities presents information showing how the Town's net assets changed during the most recent year. Revenues and expenses are reported by activity to give the reader an understanding of how each of the Town's activities is being supported. All changes in net assets are reported as soon as the underlying event giving rise to the change occurs, regardless of the timing of related cash flows. Thus, revenues and expenses are reported in this statement for some items that will only result in cash flows in future periods. This method is known as the accrual basis of accounting and is different from the modified accrual basis of accounting used in the Town's fund financial statements. The Town's government-wide financial statements includes both the governmental activities of the Town itself (known as the primary government) and of its legally separate component units for which the Town is financially accountable. Financial information for all component units is reported separately (discretely presented) from the financial information presented for the primary government. -3- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,2011 OVERVIEW OF THE FINANCIAL STATEMENTS (continued) Government-wide Financial Statements (continued) Governrnenta/ Activities - The Town's basic services are reported here, including: general government support; education; public safety; transportation; economic assistance and opportunity; cultural and recreation and home and community services. Property taxes, mortgage taxes, franchise fees, fines, and state and federal grants finance these activities. The Town also charges fees to customers to help it cover the cost of certain services it provides. Component Units - Component units are legally separate organizations for which the Town is either financially accountable, or the nature and significance of their relationship with the Town is such that exclusion would cause the Town's financial statements to be misleading or incomplete. All of these entities are reported in a separate column in the government-wide statements as discretely presented. tnformation on separately issued financial statements is shown in Note E to the financial statements. Fund Financial Statements The fund financial statements focus on current available resources and are organized and operated on the basis of funds, each of which is defined as an accounting entity with a self-balancing set of accounts established for the purpose of carrying on specific or attaining certain objectives in accordance with special regulations, restriction or limitations. The Town, like other governments, uses fund accounting to ensure and demonstrate compliance with finance-related legal requirements. All of the funds of the Town can be divided into two categories: governmental funds and fiduciary funds. Governmental Funds The Town's activities are reported in governmental funds. Governmental funds are used to account for essentially the same functions reported as governmental activities in the government-wide financial statements. However, unlike the government-wide financial statements, governmental fund financial statements focus on near-term inflows and outflows of spendable resources, as well as on balances of spendable resources available at the end of the year. Such information may be useful in evaluating a government's near-term financial requirements. Because the focus of governmental funds is narrower than that of the government-wide financial statements, it is useful to compare the information presented for governmental funds with similar information presented for governmental activities in the government-wide financial statements. By doing so, readers may better understand the long-term effect of the Town's near term financial decisions. Both the governmental fund balance sheet and governmental fund statement of revenues, expenditures, and change in fund balances provide a reconciliation to facilitate this comparison between governmental funds and governmental activities. The Town maintains ten (10) individual governmental funds. Information is presented separately in the governmental fund balance sheet and in the governmental fund statement of revenues, expenditures, and changes in fund balances for the four (4) major funds. The General Fund, Highway Fund, Capital Projects Fund and Community Preservation Fund are reported as major funds. Data from the six (6) other governmental funds are combined into a single, aggregated presentation. The Town adopts an annual appropriated budget for its general and special revenue funds, except for the capital projects fund and special grant fund. A budgetary comparison schedule for the general fund, highway fund, and community preservation fund can be found in the section labeled "Required Supplementary Information Other Than Management's Discussion and Analysis". Fiduciary Funds A~I of the Town's fiduciary activities are reported in a separate Statement of Fiduciary Net Assets. We exclude these activities from the Town's other financial statements because the Town cannot use these assets to finance its operations. The Town is responsible for ensuring that the assets reported in these funds are used for their intended purposes. -4- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,2011 OVERVIEW OF THE FINANCIAL STATEMENTS (continued) Notes to the financial statements The notes provide additional information that is essential to a full understanding of the data provided in the government-wide and fund financial statements. The notes to the financial statements can be found following the basic financial statements. Other information In addition to the basic financial statements this report contains supplementary information immediately following the notes to the financial statements. GOVERNMENT-WIDE FINANCIAL ANALYSIS As noted earlier, net assets may serve over time as a useful indicator of a government's financial position. In the case of the Town, assets exceeded liabilities by $100,202,377 at the close of the most recent year. Condensed Statement of Net Assets Primary Governmental Activities December 31, Assets Current and other assets Capital assets Total Assets Liabilities Current and other liabilities Long-term liabilities Total Liabilities Net Assets Invested in capital assets, net of related debt Restricted: Land acquisition Unrestricted (Deficit) Total Net Assets 2011 2010 $ 41,152,877 $ 26,385,103 150,870,904 144,271,376 192,023,781 170,656,479 24,280,729 17,254,779 67,540,675 51,428,253 91,821,404 68,683,032 112,161,093 108,425,137 10,855,163 6,002,350 (22,813,879) (12,454,040) $ 100,202,377 $ 101,973,447 Total assets of the primary government as of December 31, 2011 were $192,023,781, an increase of $21,367,302. Total liabilities as of December 31, 2011 were $91,821,404, which represents an increase of $23,138,372 from December 31, 2010. This results in a net asset balance of $100,202,377, a decrease of $1,771,070. Of the Town's net asset balance, $112,161,093 were invested in capital assets, net of related debt and $10,855,163 was restricted for future land acquisition leaving a $22,813,879 unrestricted deficit. By far the targest portion of the Town's net assets $112,161,093, reflects its investment in capital assets (i.e. land, buildings, machinery and equipment, intangibles, and infrastructure); less any related debt used to acquire those assets that is still outstanding. The Town uses these capital assets to provide services to citizens; consequently, these assets are not available for future spending. Although the Town's investment in its capital assets is reported net of related debt, it should be noted that the resources needed to repay this debt must be provided from other sources, since the capital assets themselves will not be used to liquidate these liabilities. TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,2011 GOVERNMENT-WIDE FINANCIAL ANALYSIS (continued) The deficit batance of unrestricted net assets does not necessarily indicate fiscal stress. At the end of the current year, the Town is able to report a positive balance in the categories of invested in capital assets, net of related debt, and restricted. The same situation held true for the prior year. The deficit balance in unrestricted arose primarily due to long-term liabilities which include other postemployement benefits, compensated absences, claims and judgments and landfitl closure and postclosure costs that will be funded through future budgetary appropriations when they become payable in future periods. Changes in Net Assets Primary Governmental Activities For the years ended December 31, Program Revenues Charges for services Operating grants and contributions Capital grants and contributions General Revenues Real property taxes Other real property tax items Non-property tax items Interest earnings State aid - unrestricted Other Total Revenues Program Expenses General government support Public safety Public health Transportation Economic assistance and opportunity Culture and recreation Home and community services Interest on debt Total Expenses increase (Decrease) in Net Assets 2011 2010 $ 3,915,039 $ 3,454,614 1,278,652 1,154,616 1,939,799 3,120,735 7,133,490 7,729,965 29,694,522 29,310,575 94,277 94,923 4,770,088 5,056,210 130,503 185,803 947,121 1,317,314 1,695,355 939,436 37,331,866 36,904,261 44,465,356 44,634,226 9,355,688 8,198,435 18,122,010 16,424,971 33,788 39,276 7,964,250 7,864,050 1,998,220 1,840,981 537,449 483,285 6,815,221 6,622,084 1,409,800 1,313,163 46,236,426 42,786,245 $ (1,771,070) $ 1,847,981 Net assets, from all government activities, decreased by $1,771,070 in the current year. Key elements of the governmental activities are: · Overall program revenues decreased by $596,475 from the prior year. Charges for services increased by $460,425 primarily due to an increase in commercial waste removal due to the Town lowering the commercial garbage rate which resulted in increased volume. Capital grants decreased by $1,180,936 primarily related to Federal aid received to fund the land acquisitions in the prior year. General revenues increased $427,605 due to a combination of increased rear property taxes of $383,947, a decrease in mortgane tax and transfer tax revenue of $656,315 offset by an increase in other revenues of $755,919. · Overall expenses increased by $3,450,181. The increase is due to the increase in employee benefits of $2,243,161 which has been allocated to the various functions and the increase in the ongoing recognition of the OPEB costs. -6- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,201 1 GOVERNMENT-WIDE FINANCIAL ANALYSIS (continued) Total Cost of Se~ces Primary Governmental Activities For the years ended December 31, Total Coat of S~ices Program Revenues Net Cost of Services 2011 2010 2011 2010 2011 2010 General govemment support $ 9,355,688 $ 8,198,435 $ 568,180 $ 553,277 $ (8,787,508) (7,645,158) Public ssfety 18,122,010 16,424,971 814,737 742,679 (17,307,273) (15,682,292) Public health 33,788 39,276 10,193 11,033 (23,595) (28,243) Transportation 7,964,250 7,864,050 847,046 507,082 (7,117,204) (7,356,968) Economic assistance and opportunity 1,998,220 1,840,981 472,879 448,066 (1,525,341) (1,392,915) Culture and recreation 537,449 483,285 222,502 221,361 (314,947) (261,924) Home and community services 6,815,221 6,622,084 4,197,953 5,246,467 (2,617,268) (1,375,617) Interest on debt 1,409,800 1,313,163 (1,409,800) (1,313,163) $ 46,236,426 $ 42,786,245 $ 7,133,490 $ 7,729,965 $ (39,102,936) $ (35,056,280) The total cost of all governmental activities this year was $46,236,426. The net cost of these services after being subsidized by program revenues of $7,133,490 was $39,102,936. $20,000,000 $18,000,000 $16,000,000 $14,000,000 $12,000,OO0 $10,000,000 $8,000,000 $6,000,000 $4,000,000 $2,000,000 $- Expenses and Program Revenues Governmental Activities -7- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2011 FINANCIAL ANALYSIS OF THE TOWN'S FUNDS Governmental Funds Operating grants and contributions 3% Other general revenues 15% Charges for services 9% State aid - unrestricted 2% Capital grants and contributions 4% Revenue by Source Primary Governmental Activities for the year ended December 31, Real property taxes State aid - unrestricted Charges for services Other general revenues Operating grants and contributions Capital grants and contributions 2011 2010 $ 29,694,522 $ 29,310,575 947,121 1,317,314 3,915,039 3,454,614 6,690,223 6,276,372 1,278,652 1,154,616 1,939,799 3,120,735 $ 44,465,356 $ 44,634,226 The focus of the Town's governmental funds is to provide information on near-term inflows, outflows, and balances of spendable resources. Such information is useful in assessing the Town's financing requirements. In particular, spendable fund balance may serve as a useful measure of a government's net resources available for spending at the end of the year. -8- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,2011 FINANCIAL ANALYSIS OF THE TOWN'S FUNDS (continued) Governmental Funds (continued) The Town has implemented Governmental Accounting standards Board (GASB) Statement No. 54, Fund Balance Reporting and Government Fund Type Definitions. As a result of this implementation, the fund balance section of the balance sheets of the governmental funds has been modified. The change has been made in order for the Town's new fund balance components to focus on "the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent". Previously, the fund balance section focused on whether these resources were available for appropriation. It also distinguished the unreserved fund balance from the reserved fund balance. In order to show compliance with GASB Statement No. 54, however, the components of the new fund balance include the following line items: · Nonspendable fund balance - $854,387 (inherently non spendable) includes the portion of net resources that cannot be spent because they must be maintained intact. · Restricted fund balance - $10,855,163 (externally enforceable limitations on use) include amounts subject to limitations imposed by creditors, grantors, contributors, or laws and regulations of other governments. · Assigned fund balance - $5,411,290 (limitation resulting from intended use) consists of amounts where the intended use is established by the highest level of decision making. · Unassigned fund balance - $2,459,666 (residual net resources) is the total fund balance in the general fund in excess of nonspendable, restricted, and assigned fund balance, of $4,212,703 and the deficit $1,753,037 in the capital projects fund in excess of restricted fund balance. The implementation of these new components is intended to increase clarity and help service the need of the financial statement users. See Note B.2 for more information. The following schedule presents a summary of the Governmental Funds - (General, Special Revenue, and Capital Projects) revenues and expenditures for the year ended December 31, 2011, and the amount of change and percentage of total in relation to the prior year. Increase % 2011 2010 (Decrease) Change REVENUES Real property taxes Other real property tax items Non-property tax items Depadmental income Intergovernmental charges Use of money and property Licenses and permits Fines and forfeitures Sale of property and compensation for loss Miscellaneous local soumes Interfund revenues State aid Federal aid Total Governmental Fund Revenues 29,694,522 $ 29,310,575 94,277 94,923 4,770,088 5,056,210 3,031,325 2,513,430 271,087 222,907 330,249 351,416 448,045 412,723 184,388 225,311 1,392,580 614,216 320,475 415,241 30,000 30,000 1,742,257 1,895,546 2,213,870 3,267,509 $ 383,947 (646) (286,122) 517,895 48,180 (21,167) 35,322 (40,923) 778,364 (94,766) (153,289) 1,053,639) 1.3% -0.7% -5.7% 20.6% 21.6% -6.0% 8.6% -18.2% 126.7% -22.8% 0.0% -8.1% -32.2% $ 44,523,163 $ 44,410,007 $ 113,156 0.3% -9- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,2011 FINANCIAL ANALYSIS OF THE TOWN'S FUNDS (continued) Governmental Funds (continued) 2011 2010 Increase % (Decrease) Change EXPENDITURES General government support Public safety Public health Transportation Economic assistance and oppor[unity Culture and recreation Home and community services Employee benefits Capital Debt service principal and interest Total Governmental Fund Expenditures $ 5,878,258 $ 5,201,748 $ 676,510 13.0% 10,530,630 9,758,347 772,283 7.9% 33,788 33,788 0.0% 3,650,352 3,384,027 266,325 7.9% 1,165,355 1,118,864 46,491 4.2% 277,281 282,289 (5,008) -1.8% 12,333,966 10,760,705 1,573,261 14.6% 10,234,066 8,559,979 1,674,087 19.6% 1,673,943 1,787,275 (113,332) -6.3% 3,201,012 3,261,848 (60,836) -1.9% $ 48,978,651 $ 44,148,870 $ 4,829,781 10.9% The Town appropriated a total of $2,111,000 of prior year balance for the 2011 budget. Total revenues are consistent with prior year. There was an increase in departmental income of $517,895 due to increase in solid waste removal revenue and an increase in the sale of property and compensation for loss of $778,364 due to a large insurance recovery received. These increases were offset by a decrease in federal aid of $1,053,639. Overall, governmental expenditures increased $4,829,781. The increase is due to the following: increases in public safety salaries and purchases of equipment of $716,773; a $455,738 increase in hauling fees due to the Town's decrease in rates which resulted in an increase in volume of solid waste receipts. In addition, there were increases in community preservation land acquisitions of $1,322,816 and $2,131,776 in employee benefits primarily relating to insurance benefits of $1,361,979 and retirement benefits of $771,788 with an offsetting decrease of $363,768 in transfers for medical claims in the current year. General Fund The General Fund is the chief operating fund of the Town. At the end of the current year, the total fund balance of the General Fund was $8,224,732 increasing by $801,631 or 11% from the prior year. Of this amount, $696,980 is not in spendable for (inventory and prepaid items). The remaining $7,527,752 of the fund balance is in spendable form as follows: $1,499,060 is assigned for insurance claims; $1,753,178 has been assigned by the Town Board for the subsequent year's budget and $62,811 has been assigned for purchase orders by the Town Comptroller, and the remaining $4,212,703 represents spendable, unassigned fund balance. As a measure of the General Funds' liquidity, it may be useful to compare spendable fund balance and total fund balance to total fund expenditures and other financing uses. Spendable and total fund balance represents 28% and 30% of total General Fund expenditures and other financing uses. The key elements of the fund balance increase of $801,631 are as follows: · There was a planned fund balance reduction of $1,914,000, a result of appropriations in the current year's budget. · General government support was $1,096,694 under budget due to unallocated insurance and judgment and claims expenditures $345,206 under budget, $261,596 in buildings and grounds under budget due to budgeted salaried positions not being filled and improvements budgeted that were lower than anticipated and the general implementation of expenditure reductions providing additional savings of $489,892. · Public safety was $788,624 under budget due to the Town budgeting for substantial salary increases due to the expiration of the PBA contract. Actual costs were considerably lower due to contract negotiations. · Employee benefits were $762,926 under budget primarily due to the Town budgeting for a significant insurance claim not knowing the extent of Town's exposure until after the budget was prepared. The Town's exposure was limited due to their insurance coverage. -10- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2011 FINANCIAL ANALYSIS OF THE TOWN'S FUNDS (continued) Highway Fund At the end of the current year, the total fund balance of the Highway Fund was $994,520 increasing by $352,054 or 55% from the prior year. Of this amount, $79,494 is not in spendable for (prepaid items). The remaining $915,026 of the fund balance is in spendable form as follows: $290,000 has been assigned by the Town Board for the subsequent year's budget, $70,818 has been assigned for pumhase orders by the Town Comptroller, and the remaining $554,208 is assigned for highway purposes. The key elements of the fund balance increase of $352,054 are as follows: · There was a planned fund balance reduction of $228,850, a result of appropriations in the current year's budget. · Federal and state aid was over budget by $111,966 resulted almost entirely from a FEMA reimbursement for storm clean up costs related to Hurricane Irene in late August 2011. · Transportation savings of $341,230 resulted from lower than normal road stabilization costs. Capital Projects Fund At the end of the current year, the Capital Projects Fund had a total fund balance deficit of $1,753,037. The deficit will be eliminated with the issuance of long term bonds in subsequent periods. The fund balance increased in the Capital Projects Fund by $2,692,675 from the prior year. The increase resulted from differences in timing between project expenditures and encumbrances and the recognition of corresponding permanent financing. The prior year deficit was partially eliminated with the scheduled long term bonds debt issuance in 2011. Community Preservation Fund At the end of the current year, the Community Preservation Fund had a total restricted fund balance of $10,845,180. The fund balance increased in the Community Preservation Fund by $4,842,830. · Non-property tax items and federal aid was over budget by $690,355 and $1,267,623, respectively due to unanticipated increases in these revenue sources. · Home and community services were under budget by $5,077,271 due to the Town purchasing land with community preservation funds and bond proceeds. Nonmajor Governmental Funds The net change in fund balances was an increase of $30,322. · There was an originally planned use of fund balance of $531,585 to hold the line on property taxes in 2011. · The $509,718 surplus in departmental income in the Solid Waste Management Fund was a result of the Town's reduction of the commercial garbage rate which attracted waste not previously handled by the Town. -11- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,2011 GENERAL FUND BUDGETARY HIGHLIGHTS The Town appropriated expenditures in the original General Fund Budget in excess of estimated revenues in the amounts of $1,941,000, inclusive of $27,000 of encumbrances, by designating unreserved fund balance from the prior year. Actual revenues were less than anticipated by $149,758. Actual expenditures in all budgetary line items were less than the budgetary appropriation by $2,820,564. Over the course of the year, the Town Board revises the budget as needed so that expenditures do not exceed appropriations. In all Town funds, various transfers between appropriations were approved for this purpose. The following are the main components of the increase in appropriations: · Sale of property and compensation for loss increased by $996,137 due to a large insurance recovery received. There was a corresponding increase in appropriations to employee benefits to accrue the cost of that medical claim to be paid subsequent to year end. · Public safety increased by $577,802 to pay for the compensation for retirees. CAPITAL ASSET AND DEBT ADMINISTRATION Capital Assets As of December 31, 2011 the primary government had $150,870,904 in net capital assets including land, land development rights, buildings, improvements, machinery and equipment, and infrastructure. The Town's component units had $16,945,620 in net capital assets including land, land development rights, buildings, improvements, machinery and equipment, and infrastructure. Capital Assets at December 31, Primary Government Land Land development rights Construction in progress Buildings improvements other than buildings Machinery and equipment Software Infrastructure Total Capital Assets Less: accumulated depreciation Primary Government - Total Net Capital Assets 2011 2010 6,635,131 $ 5,256,156 107,616,052 100,094,235 680,052 1,337,090 12,770,832 12,759,942 15,701,292 15,410,764 10,763,984 10,661,595 742,498 567,152 75,375,350 73,594,619 230,285,191 219,681,553 79,414,287 75,410,177 $ 150,870,904 $ 144,271,376 Component Units Land Construction in progress Buildings Improvements other than buildings Machinery and equipment Infrastructure Total Capital Assets Less: accumulated depreciation Component Units - Total Net Capital Assets $ 2,193,353 $ 2,193,353 92,382 14,243,397 14,227,122 2,349,227 2,336,272 3,530,487 3,518,312 2,899,442 2,804,422 25,215,906 25,171,863 8,270,286 7,496,338 $ 16,945,620 $ 17,675,525 -12- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31, 2011 CAPITAL ASSET AND DEBT ADMINISTRATION (continued) Capital Assets (continued) The capital program is a long range financing guide and not a definitive plan. Each appropriation must be authorized by Town Board resolution before being undertaken. Each may be financed by issuance of general obligation bonds, which, at times, are preceded by issuance of bond anticipation notes for various periods of time depending on the probable usefulness of the purpose of expenditure. The following sets forth a summary of the Town's capital program. Equipment 2012 General Fund $ 34,000 Highway Fund 525,000 Total Equipment 559,000 Improvements General Fund 105,500 Total Improvements 105,500 Total Program $ 664.500 Additional information on the Town's capital assets can be found in Note C.3 to the financial statements. Long-Term Debt The Town of Southold's bond credit rating from Mood~/s Investors Services was Aa2 as of December 31,2011. Debt Limit - The Town has the power to contract indebtedness for any Town purpose so long as the principal amount thereof, subject to certain limited exceptions, shall not exceed seven percent of the average full valuation of taxable real estate of the Town, and subject to certain enumerated exclusions and deductions such as water and certain sewer facilities and cash or appropriations for current debt service. The constitutional method for determining full valuation is calculated by taking the assessed valuation of taxable real estate as shown upon the latest completed assessment roll and dividing the same by the equalization rate as determined by the State Board of Equalization and Assessment. The State Legislature is required to prescribe the manner by which such ratio shall be determined. Average full valuation is determined by taking the sum of the full valuation of the last completed assessment roll and the four preceding assessment rolls and dividing such sum by five. Percentage of debt contracting power exhausted at December 31, 2011 was 6.51%. At December 31, 2011, the Town had approximately $44.4 million in long term general obligation bonds outstanding, of which $42.5 million was for the primary government. Also outstanding at year-end were bond anticipation notes in the amount of $2.9 million of which $2.3 million was for the primary government. Additional information on the Town's debt activity can be found in Note C.4 to the financial statements. ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES Property Tax The Town has adopted a budget for the 2012 fiscal year which factors in inflation and other adjustments to revenues and expenditures as well as prior year positive and negative fund balances. The 2012 budget includes an overall increase in real property tax revenues from the prior year of approximately 2.38% for the general Town governmental activities. -13- TOWN OF SOUTHOLD MANAGEMENT'S DISCUSSION AND ANALYSIS December 31,2011 ECONOMIC FACTORS AND NEXT YEAR'S BUDGETS AND RATES (continued) Property Tax (continued) In June 2011, New York State enacted Chapter 97, Laws of 2011 Real Property Tax Levy Cap and Mandate Relief Provisions, which includes a 2% property tax cap for municipalities that affects the Town and its municipal component units. Beginning in 2012, and lasting through at least June 15, 2016, no local government is authorized to increase its property lax levy by more than 2% or the rate of inflation (whichever is less); however the permitted increase will not be tess than 1%. Local governments can exceed the tax levy limit by a 60% vote of the governing body, or local law. There are permitted exceptions and adjustments. The Town is currently evaluating the effect of the cap on future year's budgets. State Aid and Local Assistance The Town receives financial assistance from New York State and from Suffolk County. During 2011, financial assistance included state aid consisting of mortgage tax of $974,928, consolidated highway aid of $342,355, and other state aid of approximately $328,684. State aid per capita was $88,328 and County local government assistance was $271,087. Additionally, if the State should not adopt its budget in a timely manner, municipalities and school districts in the State, including the Town, may be affected by a delay in the payment of state aid. The State is not constitutionally obligated to maintain or continue state aid to the Town. The Town's 2012 budget included similar amounts for this financial assistance. CONTACTING THE TOWN'S FINANCIAL MANAGEMENT This financial report is designed to provide our citizens, taxpayers, customers, and creditors with a general overview of the Town's finances and to show the Town's accountability for the money it receives. If you have questions about this report or need additional financial information, contact the Town of Southold, Office of the Town Comptroller, Southold, New York. -14- BASIC FINANCIAL STATEMENTS ASSETS TOWN OF SOUTHOLD GOVERNMENT-WIDE FINANCIAL STATEMENT STATEMENT OF NET ASSETS December 31, 2011 Current Assets: Cash and investments Cash - restricted Accounts receivable Due from other governments Due from primary government State and federal aid receivables Prepaid charges Inventory of material and supplies Total Current Assets Non-Current Assets: Deferred charges, net of accumulated amortization Non-depreciable capital assets Depreciable capital assets, net of depreciation Total Non-Current Assets LIABILITIES Current Liabilities: Accounts payable and accrued liabilities Accrued interest payable Bond anticipation notes payable Due to other governments Due to component units Unearned revenue Non-current liabilities due within one year General obligation bonds payable Compensated absences Claims and judgments payable Estimated liability for landfill closure and postclosure care costs Total Current Liabilities Non-Current Liabilities: General obligation bonds payable Due to employees retirement system Compensated absences Estimated liability for landfill closure and postclosure care costs Other postemployment benefits payable Total Non-Current Liabilities NET ASSETS Investment in capital assets, net of related debt Restricted: Unrestricted (Deficit) Total Assets Total Liabilities Total Net Assets Primary Governmental Component Activities Units $ 25,971,034 $ 2,390.966 10,413,847 1,107.286 45,648 1,727.432 675,461 957,511 851.764 83,700 2.623 41,031,497 31195,775 121,380 114,931,235 2,193,353 35,939,669 14,752,267 150,992,284 16,945,620 192,023,781 20,141,395 1,828,167 257.067 461,610 27,206 2,342,000 650.000 5,814,612 2,327 675,461 9,268,004 675,668 2,480,000 175,000 90,000 52,329 1,296,335 24,540 24,280,729 1,839,597 40,005,000 1,725,000 240,909 7,397.291 161,583 944,566 18,952,909 323,155 67,540,675 2,209,738 91,821,404 4,049,335 112,161,093 13.866,127 10,855,163 (22,813,879) 2.225,933 $100,202,377 $ 16,092,060 See notes to the financial statements. Function/Program PRIMARY GOVERNMENT Government Activities: General government support Public safety Public health Transportation Economic assistance and opportunity Culture and recreation Home and community services Interest on debt TOWN OF SOUTHOLD GOVERNMENT-WIDE FINANCIAL STATEMENT STATEMENT OF ACTiVITiES Year ended December 31,2011 Program Revenues Operating Capital Charges for Grants and Grants and Expenses Services Contributions Contributions Net Expenses and Change in Net Assets Pdmary Component Government Units Total Primary Government $ 9,355,688 $ 233,130 $ 312,921 $ 22,129 $ (8,787,508) 18,122,010 616,978 197,759 (17,307,273) 33,788 10,193 (23,595) 7,964,250 10,410 249,093 587,543 (7,117,204) 1,998,220 199,619 248,286 24,974 (1,525,341) 537,449 222,502 (314,947) 6,815,221 2,632,400 260,400 1,305,153 (2,617,268) 1,409,800 (1,409,800) $ 46,236,426 $ 3,915,039 $ 1,278,652 $ 1,939,799 $ (39,102,936) COMPONENT UNITS General government support Public health Transportation Culture and recreation Home and community services Interest on debt $ 233,147 78,463 3,323,353 $ 2,587,181 848,579 621,174 48,857 83,279 Total Component Units $ 5,187,995 $ 2,636,038 $ $ 70,285 -0- .$ 70,285 (233,147) (78,463) (665,887) (848,579) (572,317) (83,279) $ (2,481,672) GENERAL REVENUES Real property taxes $ 29,694,522 Other real property tax items 94,277 Non-property tax items 4,770,088 Interest earnings 130,503 State aid - unrestricted 947,121 Other 1,695,355 Total General Revenues $ 2,158,270 118 10,199 271,895 37,331,866 2,440,482 Change in Net Assets (1,771,070) (41,190) Net Assets at Beginning of Year 101,973,447 16,133,250 Net Assets at End of Year $ 100,202,377 $ 16,092,060 See notes to financial statements. -16- TOWN OF SOUTNOLD BALANCE SHEET GOVERNMENTAL FUNDS December 31,2011 ASSETS Cash and investments Cash - resthcted Accounts receivable Due from other funds State and federal aid receivable Due from other governments Supply inventory Prepaids Total Assets LIABILITIES AND FUND BALANCES LIABILiTiES Accounts payable Judgments and claims Retained percentages Bond an6cipation notes payable Due to other funds Due to component units Due to other governments Deferred revenue Total Liabilities FUND BALANCE Nonspendable Restricted Assigned Unassigned Total Fund Balance (Deficit) Total Liabilities and Fund Balance MAJOR GOVERNMENTAL FUNDS Non-Major Capital Community Governmental Highway Projects Preservation Funds $ 23.606,360 $ 798.148 $ 642.975 $ 923,551 $ 25,971.034 $ 10,413,847 10,413,847 889,156 4,694 213,436 1,107,286 12.476 1.438.917 229.606 1,226,027 2.907,026 456.993 314,115 12,474 173,929 957,511 1,056,937 444.083 1,501.020 2.623 2,623 694.357 79.494 77,913 851,764 $ 26,718,902 $ 2,630,674 $ 885,05~5 $ 10,862,62~4 $ 2,614,85~6 $ 43,712,111 $ 1,061,231 $ 199.781 $ 250.681 $ 17,444 $ 266.593 $ 1.795.730 1,296.335 1,296.335 32.437 32.437 2,342,000 2.342,000 2.890,552 4,000 12,474 2,907,026 675,461 675,461 5,814.612 5,814,612 6.755.979 1.432.373 500 1,079.152 9,268.004 18,494,170 1,636,154 2,638,092 17,444 1,345,745 24,131,605 69~,980 79,494 3,315,049 915,026 4,212,703 (1,753,037) 8,224,732 994,520 (1,753,037) $ 26,718,90~2 $ 2,630,67,4 $ 885.~..~,055 77.913 854.387 9.983 10.855,163 1,181,215 5,411.290 2.459,666 10,845,180 1,269,111 19,580,506 $ 10,862,624 $ 2.614.856 $ 43.712,111 See notes to the financial statements, TOWN OF SOUTHOLD RECONCILIATION OF THE GOVERNMENTAL FUNDS BALANCE SHEET TO THE STATEMENT OF NET ASSETS December 31,2011 Total Fund Balances - Governmental Funds Amounts reported for governmental activities in the Statement of Net Assets are different because: Capital assets less accumulated depreciation are included in the Statement of Net Assets: Capital assets - non-depreciable Capital assets - depreciable Accumulated depreciation $114,931,235 115,353,956 (79,414,287) Long-term liabilities applicable to the Town's governmental activities are not due and payable in the current period and accordingly are not reported in the funds. However these liabilities are included in the Statement of Net Assets: General obligation bonds payable Due to employees retirement system Compensated absences Estimated liability for landfill closure and postclosure care costs Other postemployment benefits payable $ (42,485,000) (240,909) (7,487,291) (969,106) (18,952,909) Revenues in the Statement of Activities that do not provide current financial resources are not reported as revenues in the funds. Deferred charges, included in the Statement of Net Assets Interest payable applicable to the Town's governmental activities are not due and payable in the current period and accordingly are not reported in the funds. However these liabilities are included in the Statement of Net Assets. Net Assets of Governmental Activities $ 19,580,506 150,870,904 (70,135,215) 226,412 121,380 (461,610) $100,202,377 See notes to financial statements. -18- TOWNOFSOUTHOLD STATEMENT OF REVENUES, EXPENDITURES AND CHANGESIN FUND BALANCES GOVERNMENTALFUNDS Fortheyearended December31,2011 MAJOR GOVERNMENTAL FUNDS Non-Major Capital Community Governmental General Highway Projects Preservation Funds REVENUES Real property taxes $ 21.734,453 $4.586,896 Other real property tax items 85.765 7.148 Non-property tax items 885.473 Departmental income 529,774 lntargovernmenta[ charges and local aid 271,087 Use of money and property 270.073 6.583 Licenses and permits 269.551 10.410 Fines and forfeitures 184.388 Sale of property and compensation for los 1.024.171 9,950 Miscellaneous local sources 310.392 Interfund revenues 30,000 State aid 1,133,604 416,217 Federal aid 508,605 240,253 Totals $ 8.187 42.974 $3,373,173 $ 29.694,522 1,364 94.277 $ 3.570.355 314.260 4.770.088 2.501.551 3.031.325 271.087 29.884 15.522 330.249 168.084 448,045 184.388 358.459 1,392.580 100 9.983 320.475 30,000 149,462 1,742,257 1,267,623 197,389 2,213,870 Total Revenues 27.237,336 5.277.457 51,161 4,867.962 7,089,247 44,523,163 EXPENDITURES Current: General government support Public safety Public health Transportation Economic assistance and opportunity Culture and recreation Home and community services Employee benefits Capital Outlay Debt Service: Principal Interest Total Expenditures Excess (Deficiency) of Revenues Over Expenditures Other Financing Sources (Uses) Debt proceeds Transfers in Transfers out Total Other Financing Sources (Uses) Net Change in Fund Balance Fund Balances (Deficit) at Beginning of Y~ Fund Balances (Deficit) at End of Year 5.796.536 6.283 75.439 5.878.258 9.247.050 1,283.580 10.530,630 33,788 33.788 474,404 3,175,948 3.650,352 1.165,355 1,165.355 277,281 277.281 419.977 8.389,229 3.524.760 12.333.966 7,534.913 1,517.515 1.181,638 10.234,066 1.673.943 1,673.943 647.425 85.000 791.500 466.075 1.990.000 152,690 11.657 844.403 202,262 1,211,012 25.749.419 4.796,403 1.673.943 10,025,132 6.733.754 48.978.651 1,487.917 481.054 !1.622.782) (5,157,170) 355.493 (4.455.488) 3,175.000 10.000.000 13.175.000 1.140.457 1.140.457 (686,286) (129.000) . (325.171) (1.140.457) (686,286) (129,000) 4.315,457 10.000.000 (325.171) 13.175.000 801,631 352,054 2,692.675 4.842,830 30.322 8.719.512 7.423.101 642.466 (4.445.712) 6,002.350 1.238.789 10.860.994 $ 8,224.732 $ 994,520 $ (1.753.037) $ 10,845.180 $1.269.111 $19.580.506 TOWN OF SOUTHOLD RECONCILIATION OF THE GOVERNMENTAL FUNDS STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES TO THE STATEMENT OF ACTIVITIES For the year ended December 31,2011 Net Change in Fund Balance Governmental funds report capital outlays as expenditures. However, in the Statement of Activities the cost of those assets is allocated over their estimated useful lives and reported as depreciation expense. The amount by which capital outlay exceeds depreciation in the current period is: Capital outlay Depreciation expense Loss on dispositions 10,994,209 (4,382,717) (11,964) Revenues in the Statement of Activities that do not provide current financial resources are not reported as revenues in the funds. Some expenses reported in the Statement of Activities do not require the use of current financial resources and therefore, are not reported as expenditures in governmental funds: Prepaid charges Deferred charges The issuance of long-term debt and increase in obligations under capital leases provides current financial resources to governmental funds, while the repayment of the principal of long term debt and capital leases consumes the current financial resources of governmental funds. Neither transaction has any effect on net assets. Bonds issued Repayment of bond principal Due to employees retirement system Compensated absences Estimated liability for landfill closure and postclosure care costs Other postemployment benefits payable Accrued interest payable Change in Net Assets of Governmental Activities $ 8,719,512 6,599,528 (27,807) (555,673) (31,110) (13,175,000) 1,990,000 71,928 57,080 24,230 (5,244,970) (198,788) $ (1,771,070) See notes to financial statements. -20- TOWN OF SOUTHOLD STATEMENT OF FIDUCIARY NET ASSETS December 31,2011 ASSETS Cash and investments Other receivables LIABILITIES Due to other governments Other liabilities Deposits heed Town Fishers Island Ferry District $ 15,037,334 $ 583 Total Assets $ 15,037,917 $ Totals Total Liabilities 54 $15,037,388 583 54 $15,037,971 $ 14,605,901 232,531 199,485 $ 15,037,917 $ $14,605,901 54 232,585 199,485 54 $15,037,971 See notes to financial statements. -21- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31~ 2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The Town of Southold (the "Town"), which was established in 1640, is governed by Town Law and other general laws of the State of New York and various local laws. The Town Board is the legislative body responsible for overall operations. The Town Board consists of the Supervisor who is elected for a term of four years and five council members who are elected for terms of four years. The Town Board appoints the Town Attorney, Comptroller and the Commissioner of Public Works whose terms are fixed by Town Law. The Town Clerk, Receiver of Taxes, Superintendent of Highways, Justices and Town Trustees are all elected and serve for four years, respectively. The Town provides a full range of municipal services, including public safety, transportation, home and community services, public works and road maintenance, recreation and parks, and general and administrative services. The financial statements of the Town of Southold have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) as applied to governmental units. The Governmental Accounting Standards Board (GASB) is the accepted standard setting body for establishing governmental accounting and financial reporting principles. The more significant of the government's accodnting policies are described below. 1. REPORTING ENTITY The financial reporting entity consists of: la) the primary government, which is the Town of Southold; lb) organizations for which the primary government is financially accountable; and lc) other organizations for which the nature and significance of their relationship with the primary government are such that exclusion would cause the reporting entity's financial statements to be misleading or incomplete as set forth in GASB Statement No. 14 as amended by GASB Statement No. 39. The decision to include a potential component unit in the Town of Southold reporting entity is based on several criteria set forth in GASB Statement No. 14 as amended by GASB Statement No. 39 including legal standing, dependency and financial accountability. Based on the application of these criteria, the following is a summary of certain entities considered in determining the Town of Southold's reporting entity. Certain special districts of the Town of Southold are separate legal entities and have separately elected boards of commissioners. These special districts provide sanitation, ferry, and park services to residents and businesses within the districts. Special districts cannot issue bonded debt without the approval and the backing of the full faith and credit of the Town. Budgets and tax rates are approved by the Town. Tax levies of the special districts are collected by the Town Receiver of Taxes. As a result of this fiscal dependency, the Town is financially accountable for these special districts. Accordingly, these special districts have been determined to be component units of the Town and are presented discretely in a separate column in the combined financial statements to emphasize that they are legally separate from the primary government. Condensed financial statements along with the addresses of the administrative office, for these component units are presented in Note E. 2. GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS The Town's basic financial statements include both government-wide (reporting the Town as a whole) and fund financial statements (reporting the Town's major funds). Government-wide Financial Statements The government-wide financial statements (i.e. the statement of net assets and the statement of activities) report information on all of the non-fiduciary activities of the Town as a whole with separate columns for the primary governmental activities as well as the discretely presented component units. For the most part, the effect of interfund activity has been eliminated from the government-wide financial statements, except for interfund services provided and used. -22- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2. GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS (continued) Government-wide Financial Statements (continued) The government-wide Statement of Activities demonstrates the degree to which the direct expenses of a given function are offset by program revenue. Direct expenses are those that are clearly identifiable with a specific function. Program revenues include (1) charges to customers or applicants who purchase, use, or directly benefit from goods, services, or privileges provided by a given function, (2) grants and contributions that are restricted to meeting the operation and capital requirements of a particular function, (3) interest earned on grants or capital projects that is required to be used to support a particular program or project. Taxes and other items not properly included among program revenues are reported as general revenues. The Town does not allocate indirect expenses to specific functions in the Statement of Activities. Fund Financial Statements Separate financial statements are provided for governmental funds and fiduciary funds, even though the fiduciary funds are excluded from the government-wide financial statements. Major individual governmental funds are reported as separate columns in the fund financial statements. The accounts of the Town are organized on the basis of funds, each of which is considered a separate accounting entity. The operations of each fund are accounted for with a separate set of self-balancing accounts that comprise its assets, liabilities, fund balances, revenues, and expenditures, which are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with special regulations, restTictions or limitations. The various funds are presented by type in the fund financial statements. Certain funds of the Town are utilized to account for resources derived from and/or expenditures applicable to an area less than the entire Town. The focus of the governmental funds financial statements is on the major funds. Accordingly, the Town maintains the following fund types: Governmental Funds - Governmental funds are those through which most governmental functions are financed. The acquisition, use and balances of expendable financial resources and the related liabilities are accounted for through governmental funds. The measurement focus of the governmental funds is upon determination of financial position and changes in financial position. Governmental funds are further classified as major and nonmajor funds. The Town reports the following major governmental funds: General Fund - is the principal operating fund of the Town. This fund is used to account for all financial resources except those required to be accounted for in other funds. Highway Fund - used to account for the maintenance and operation of highways. Capital Projects Fund - used to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by special assessment funds and trust funds). Community Preservation Fund - is used to account for financial resources for the purchase of land and land development rights. -23- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 2. GOVERNMENT-WIDE AND FUND FINANCIAL STATEMENTS (continued) Fund Financial Statements (continued) Additionally, the Town reports the following non-major funds: Special Revenue Funds - are used to account for the proceeds of specific revenue sources (other than major capital projects) that are legally restricted to expenditures for specified purposes. Special Revenue Funds include the following: General Fund Part Town - is used to account for revenues and expenditures for certain services provided by the area of the Town located outside the Village of Greenport. Special Grant Fund - is used to account for Federal Aid for the Community Development Block Grant Program. Special District Funds - are used to account for taxes or other revenues, which are raised or received to provide special services to areas that encompass less than the whole town. Fiduciary Funds - Fiduciary Funds are used to account for assets held by the Town in a trustee or custodial capacity. Aqency Fund - is used to account for resources held as an agent for parties outside the government. Agency fund resources cannot be held for other funds. Discretely Presented Component Units Certain special districts that have separately elected boards provide transportation, park, mosquito control, and sanitation services to residents and businesses within these districts, and follow government fund accounting principles. These districts, which are accounted for as discretely presented component units, are as follows: Orient Mosquito District, established in 1916 Cutchogue-New Suffolk Park District, established in 1953 Southold Park District, established in 1907 The Fishers Island Ferry District, established in 1947 Fishers Island Waste Management District, established in 1952 Orient-East Marion Park District, established in 1969 Mattituck Park District, established in 1941 MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION Measurement focus refers to what is being measured whereas the basis of accounting refers to when revenues and expenditures are recognized in the accounts and reported in the financial statements. Basis of accounting relates to the timing of the measurement made, regardless of the measurement focus applied. The government-wide statements are reported using the economic resources measurement focus and the accrual basis of accounting. Under the accrual basis of accounting, revenues are recognized when earned and expenses are recorded when the liability is incurred, regardless of the timing of related cash flows. Property taxes are recognized as revenues in the year for which they are levied. Grants and similar items are recognized as revenue as soon as all eligibility requirements imposed by the provided have been met. -24- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 3. MEASUREMENT FOCUS, BASIS OF ACCOUNTING, AND FINANCIAL STATEMENT PRESENTATION (continued) Governmental fund financial statements are reported using the current financial resources measurement focus and the modified accrual basis of accounting. Revenues are recognized as soon as they are both measureable and available. Revenues are considered available when they are collectible within the current period or soon enough thereafter to pay liabilities of the current period. For this purpose, the Town generally considers revenues to be available if they are collected within 60 days after the year end. In certain circumstances this application of the Town's normal availability period for a given revenue source might distort revenue trends from one year to the next. In such unusual circumstances, revenues may be considered available if received beyond 60 days however to the extent the revenue remains uncollected after one year the Town would classify the fund balance as nonspendable. Revenues susceptible to accrual include Suffolk County local assistance at year end on behalf of the Town, franchise fees, and charges for services, intergovernmental revenues and operating transfers. Permits, fees, and other similar revenues are not susceptible to accrual because generally they are not measurable until they are received in cash. In those instances where expenditures are the prime factor in determining eligibility for state and federal grants, revenues are recognized when the expenditure is incurred. In the Capital Projects Fund, long-term debt is recognized as revenue upon receipt of the proceeds. Expenditures are recorded on the accrual basis except that (a) expenditures for prepaid expenses are recognized when incurred; (b) principal and interest on indebtedness are recognized as expenditures when due; (c) compensated absences, such as vacation and sick leave, which vest or accumulate, are charged as expenditures when paid. Because governmental fund statements are presented using a measurement focus and a basis of accounting different from that used in the government-wide statements governmental column, reconciliation is presented that briefly explains the adjustment necessary to reconcile ending net assets and the change in net assets. 4. ASSETS, LIABILITIES AND FUND EQUITY CASH AND CASH EQUIVALENTS Cash consists of funds deposited in demand accounts, time deposit accounts and certificates of deposit with maturities of less than three months. State statutes govern the Town's investment policies. The Town's investments are governed by a formal investment policy. The Town's monies must be deposited in FDIC-insured commercial banks or trust companies located within the state. The Town is authorized to use demand accounts and certificates of deposit. Permissible investments include obligations of the U.S. Treasury, U.S. Agencies and investments made by the Cooperative Liquid Asset Security System (CLASS). Collateral is required for demand deposits and time deposit accounts at 100% of all deposits not covered by federal deposit insurance. Obligations that may be pledged as cellateral include obligations of the United States and its agencies and obligations of the State and its municipalities and school districts. The Town's collateral agreements are based on the Town's available balance. RESTRICTED ASSETS Certain assets of the Community Preservation Fund are classified as restricted assets because their use is restricted by contractual agreements and regulations. -25- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. ASSETS, LIABILITIES AND FUND EQUITY (continued) Interfund transactions, exclusive of interfund services provided and used, have been eliminated from the government-wide financial statements. In the funds statements interfund transactions include: a) Interfund Revenues Interfund revenues, which are quasi-external transactions, in the General Fund represent amounts charged for services or facilities provided by the General Fund. The amounts paid by the fund receiving the benefit of the service or facilities are reflected as an expenditure of that fund. b) Transfers Transfers represent payments to the General Fund and Capital Projects Funds from the other funds for their appropriate share of the General Fund or capital project costs. INVENTORY AND PREPAID ITEMS Inventory in the general and special revenue funds is valued at cost. Inventory in these funds is accounted for under the consumption method. Certain payments to vendom reflect costs applicable to future accounting periods and are reported as prepaid items in both the government-wide and fund financial statements. Prepaids in the General and Special Revenue Funds represent retirement benefits that will benefit a future period. In governmental funds, amounts reported as inventories and prepaid items are equally offset by nonspendable fund balance amounts, indicating that they do not constitute "available spendable resources~ even though they are a component of net current assets. CAPITAL ASSETS Capital assets purchased or acquired with an original cost of $5,000 or more are reported at historical cost or estimated historical cost. Donated assets are reported at estimated fair market value as of the date of donation. Additions, improvements and other capital outlays that significantly extend the useful life of an asset are capitalized. Other costs incurred for repairs and maintenance are expensed as incurred. Depreciation and amodizafion on all assets is provided on the straight-line basis over the following estimated useful lives: Buildings Improvements and other Machinery and equipment Software Infrastructure 10-40 years 20 years 5-10 years 5-10 years 20-30 years Infrastructure assets, consisting of certain improvements other than buildings including roads, curbs, sidewalks, bridges, and street lighting are capitalized along with other capital assets. Intangible assets lack physical substance, are nonfinancial in nature, and have an estimated useful life extending beyond a single reporting period. The term depreciation, as used in these footnotes, includes amortization of intangible assets. In the fund financial statements, capital assets are recorded as capital outlay expenditures in the governmental fund upon acquisition. -26- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. ASSETS, LIABILITIES AND FUND EQUITY (continued) DEFERRED REVENUE/UNEARNED REVENUE Deferred revenue/unearned income are those where asset recognition criteria have been met, but which revenue recognition criteria have not been met. Such amounts include collections in advance, unearned income and amounts that have been deemed to be "measurable" but not "available" to finance current expenses. Discounts and expenses related to the issuance of long-term debt and the loss on the early retirement of refunded debt are amortized on a straight-line basis over the life of the issue, and are presented net of accumulated amortization, in the government-wide financial statements. Bond issuance costs that are immaterial are charged as operating expenses in the fund servicing the debt when incurred. In the fund financial statements bond issuance costs are recognized, during the current period, as debt service expenditures in the fund servicing the debt. LONG~ERM OBLIGATIONS In the government-wide financial statements, liabilities for long-term obligations consisting of general obligation bonds, compensated absences, claims and judgments, liability for landfill closure and postclosure costs, other postemployment benefits, and due to employees retirement system are recognized in the statement of net assets. Bond premiums or discounts, as well as issuance costs, are deferred and amortized on a straight-line basis over the life of the bonds. Bond premiums or discounts, as well as issuance costs, are deferred and amortized on a straight-line basis over the life of the bonds. Bonds payable are reported net of applicable bond premium or discount. Bend issuance costs that are immaterial are charged as a General Fund operating expense. In the fund financial statements, governmental funds recognized bond premiums and discounts, as well as bond issuance costs, during the current period. The face amount of the debt issued is reported as other financing sources. Premiums received on debt issuances are reported as other financing sources while discounts on debt issuances are reported as other financing uses. Issuance costs, whether or not withheld from actual debt proceeds received, are reported as debt service expenditures. NET ASSETS AND FUND EQUFTY CLASSIFICATIONS In the government-wide statements, equity is classified as net assets and displayed in three components: a) Invested in capital assets, net of related debt--Consists of capital assets including restricted capital assets, net of accumulated depreciation and reduced by the outstanding balances of any bonds, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of those assets. b) Restricted net assets-Consists of net assets with constraints placed on the use either by (1) external groups such as creditors, grantors, contributors, or laws or regulations of other governments; or (2) law through constitutional provisions or enabling legislation. c) Unrestricted net assets--All other net assets that do not meet the definition of "restricted" or "invested in capital assets, net of related debt." -27- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 3'1, 20'1 '1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 4. ASSETS, LIABILITIES AND FUND EQUITY (continued) NET ASSETS AND FUND EQUITY CLASSIFICATIONS (continued) Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Definitions (GASB 54) has been implemented. GASB 54 changed the terminology and classification of fund balance to reflect spending constraints on resources rather than availability for appropriation. The fund balance section of the governmental funds balances sheets have been modified accordingly. Not all of the Town's funds will necessarily have all of the components of fund balance available to that fund. The implementation of these new components is intended to increase clarity and help serve the needs of the financial statement users. In the fund financial statements, governmental funds report aggregate amounts for five classification of fund balances based on the constraints imposed on the use of these resources; they are (1) nonspendable, (2) restricted, (3) committed, (4) assigned, or (5) unassigned 1) Nonspendable fund balance includes amounts that cannot be spent because they are either (a) not in spendable form (i.e. prepaid items or inventories), or (b) will not convert to cash within the current period (i.e. long-term receivables and financial assets held for resale), or (c) legally or contractually required to be maintained intact (i.e. the principal of a permanent fund). The spendable portion of the fund balance comprises the remaining four classifications: restricted, committed, assigned, and unassigned. 2) Restricted fund balance reflects the constraints imposed on resources either (a) externally by creditors, grantors, contributors, or laws or regulation of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. 3) Committed fund balance reflects amounts that can only be used for specific purposes by a government using its highest and most binding level of decision making authority. The Town's highest decision making authority is the Town Board, who by adoption of a Town ordinance prior to year end, can commit fund balance. Those committed amounts cannot be used for any other purpose unless the Town Board removes or changes the specified use by taking the same type of action imposing the commitment. 4) 5) Assigned fund balance reflects the amounts constrained by the Town's "intent" to be used for specific purposes, but are neither restricted nor committed. The Town Board has the authority to assign amounts to be used for specific purposes. Assigned fund balances include all remaining amounts (except negative balances) that are reported in governmental funds, other than the General Fund, that are not classified as nonspendable and are neither restricted nor committed. Unassigned fund balance. This fund balance is the residual classification for the General Fund. It is also used to report negative fund balances in other governmental funds. When both restricted and unrestricted resources are available for use, it is the Town's default policy to use restricted resources first, and then unrestricted resources - committed, assigned and unassigned - in order as needed. The Town has, by resolution, adopted a fund balance policy that states the Town must maintain a minimum unassigned fund balance in the General Fund equal to 10% of General Fund expenditures. In the event that the balance drops below the established minimum level, the Town's Board will develop a plan to replenish the fund balance to the established minimum level within the current or ensuing fiscal year. -28- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. REVENUES AND EXPENDITURES REAL PROPERTY TAXASSESSMENT AND COLLECTION PROCEDURES In Suffolk County, the assessment and lien of real property for taxation is done by the County Department of Assessment. Real property taxes become a lien on December I for both school and general taxes. The Town's assessment rolls are used for the levy of real property taxes by the Town and the School Districts, as well as by the County and by Special Districts of the County and the Town. The Town of Southold Receiver of Taxes collects all real property taxes for the Town, Suffolk County, Town Special Districts and School Districts. These taxes are levied on December 1, and are due in two installments, 50% on December 1 and 50% on May 10, payable without penalty to January 10 and May 31, respectively. Penalties are imposed thereafter at the rate of one-twelfth of the rate of interest determined by the State Commissioner of Taxation and Finance, after which taxes are payable to the County Treasurer. The Town retains the total amount of Town, Highway and Town Special Districts levies from the amount collected, and forwards the balance collected to the County which assumes collection responsibility. The Town and Town's Special Districts therefore realize annually the 100% collection of real property taxes. OTHER POSTEMPLOYMENT BENEFITS In addition to providing pension benefits, the Town provides health insurance coverage and survivor benefits for retired employees and their survivors. Substantially all of the Town's employees may become eligible for these benefits if they reach normal retirement age while working for the Town. Health care benefits in accordance with New York State Health Insurance Rules and Regulations (administered by the New York State Department of Civil Service), are provided through the New York State Empire Plan (the "Empire Plan") whose premiums are based on the benefits paid throughout the State during the year or under the Town of Southold's self insurance plan which is fudher described in Note D. The Town recognizes the cost of providing benefits by recording its share of insurance premiums as an expenditure in the year paid. The Town's union contracts and ordinances require that it provide its eligible enrollees with Empire Plan benefit coverage, or if another provider is utilized, the equivalent coverage. Under the provisions of the Empire Plan, premiums are adjusted on a prospective basis for any losses experience by the Empire Plan. The Town has the option to terminate its participation in the Empire Plan at any time without liability for its respective share of any previously incurred loss. The liability for postemployment benefits payable is recorded as a non-current liability in the government-wide statements. The current year increase in the liability is based on the most recent actuarial valuation in accordance with parameters of GASB Statement No. 45. COMPENSATED ABSENCES The liability for vested or accumulated vacation or sick leave (compensated absences) is recorded as current and non-current obligations in the government-wide statements. The current portion of this debt is estimated based on historical trends and current known facts. Compensated absence liabilities and expenses are reported in governmental funds only if they have matured, for example, as a result of employee resignations, terminations, and retirements. The amount that is expected to be liquidated with expendable available financial resources is reported as expenditures and a liability in the funds statement in the respective fund that will pay the liability. -29- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) 5. REVENUES AND EXPENDITURES (continued) ENCUMBRANCES Encumbrance accounting, under which purchase orders, contracts and other commitments for the expenditures of monies are recorded for budgetary control purposes, is employed in the governmental funds. Encumbrances are reported as restrictions, commitments, or assignments of fund balances since they do not constitute expenditures or liabilities. Expenditures for such commitments are recorded in the period in which the liability is incurred. 6. USE OF ESTIMATES Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. 7. NEW ACCOUNTING PRINCIPLES The Town has adopted all of the current Statements of the Accounting Standards Board (GASB) that are applicable. During the year ended December 31, 2011, the Town adopted GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. 8. SUBSEQUENT EVENTS Management has evaluated subsequent events for disclosure and/or recognition in the financial statements through the date of the financial statements. STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY 1. BUDGETARY INFORMATION Budgets are adopted annually on a basis consistent with generally accepted accounting principles. Appropriations authorized for the current year are increased by the amount of encumbrances carried forward from the prior year. Budgets for the General and Special Revenue Funds exclusive of the Special Grant Fund, are legally adopted for each year. The budgets are adopted on a basis of accounting consistent with GAAP, except that appropriations authorized for the current year are increased by the amount of encumbrances carried forward from the prior years. In the event that actual revenues received exceed budgeted amounts, additional budgetary appropriations are made. The Capital Projects and Special Grant funds are budgeted on a project or grant basis. The Town follows the procedures enumerated below in establishing the budgetary data reflected in the financial statements: a) No later than October 1, the Supervisor submits a tentative budget to the Town Board for the fiscal year commencing the following fiscal year. The tentative budget includes the proposed means of financing for all funds. b) After public hearings are conducted to obtain taxpayer comments, no later than November 20, the Town Board adopts the budget. c) The Town Board must approve all modifications of the budget. However, the Supervisor is authorized to transfer certain budgeted amounts within departments. -30- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY (continued) 1. BUDGETARY INFORMATION (continued) d) In June 2011, New York State enacted Chapter 97, Laws of 2011 Real Property Tax Levy Cap and Mandate Relief Provisions, which includes a 2% property tax cap for municiparities. Beginning in 2012 and lasting through at least June 15, 2016, no local government is authorized to increase its property tax levy by more than 2% or the rate of inflation (whichever is less); however local governments can exceed the tax levy limit by a 60% vote of the governing body and annually adopting a local law. The Town did not exceed the cap in 2012. FUND EQUITY FUND BALANCE In order to comply with the Governmental Accounting Standards Board's (GASB) Statement No 54, Fund Balance Repoding and Governmental Fund Type Definitions, the fund balance section of the balance sheets of the governmental funds has been modified. The change has been made in order for the Town's new fund balance components to focus on "the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent" (GASB 54 paragraph 54). Previously, the fund balance section focused on whether these recourses were available for appropriation. It also distinguished the unreserved fund balance from the reserved fund balance. In order to show compliance with GASB 54 however, the components of the new fund balance incrude the following items, as needed: 1) nonspendable, 2) restricted, 3) committed, 4) assigned, or 5) unassigned. The following table provides the detail regarding fund balance categories and classifications for the governmental funds which show components of nonspendable fund balances, as well as the purposes for restricted, and assigned fund balance. The unassigned fund balance is also shown. Fund Balances: Nonspendable: Inventory Prepaid items Total Nonspendable Restricted for: Grantors and donor restrictions Home and community services Other reserves Total Restricted Capital Community Other General Highway Projects Presewation Governmental Fund Fund Fund Fund Funds Total $ 2,623 $ 2,623 694,357 $ 79,494 $ 77,913 851,764 696,980 79,494 $ -0- $ -0- 77,913 854,387 9,983 9,983 10,845,180 10,845,180 -0- -0- -C~ 10,845,180 9,983 10,855,163 1,753,178 290,000 440,484 2,483,662 62,811 70,818 133,629 554,208 740,731 1,294,939 1,499,060 1,499,060 Assigned to: Subsequent year's budget Purchases on order or contractual obligati¢ Special revenue funds Judgments and claims Total Assigned 3,315,049 915,026 -0- -0- 1,181,215 5,411,290 Unassigned, repoded in General Fund Capital Prejecls 4,212,703 4,212,703 (1,753,037) (1,753,037) Total Unrestricted 4,212,703 *0- (1,753,037) ~0~ -0- 2,459,666 Total Fund Balances $ 8,224,732 $ 994,520 $ (1,753,037) $ 10,845,180 $ 1,269,111 $ 19,580,506 -31- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 STEWARDSHIP, COMPLIANCE AND ACCOUNTABILITY (continued) 2. FUND EQUITY (continued) DEFICIT FUND EQUITY The Capital Projects Fund deficit of $1,753,037 at December 31, 2011 resulted from differences in timing between project expenditures and encumbrances and the recognition of corresponding permanent financing sources. This deficit will be eliminated as short-term debt is redeemed or converted to permanent financing. C. DETAILED NOTES ON ALL FUNDS 1. CASH AND INVESTMENTS Custodial Credit Risk - Deposits/Investments - Custodial credit risk for deposits exists when, in the event of the failure of a depository financial institution, a government may be unable to recover deposits, or recover collateral securities that are in possession of an outside agency. Custodial credit risk for investments exists when, in the event of the failure of the counterpady, a government will not be able to recover the value of its investments or collateral securities that are in possession of an outside party. CLASS is a cooperative investment plan consisting of U.S. Treasury Obligations and repurchase agreements relating to treasury obligations. Investments are stated at cost, which approximates market value. CLASS was established as a cooperative investment arrangement organized under the CLASS Municipal Cooperation Agreement made pursuant to New York General Municipal Law, Article 3A and 5-G. Collateral is required for demand deposits and certificates of deposit not covered by federal depository insurance. Obligations that may be pledged as collateral are obligations of the United States and its agencies and obligations of the state and its municipalities and school districts. Credit Risk - State law and Town law limit investments to those authorized by State statutes. The Town has a written investment policy. Interest-Rate Risk - Interest-rate risk arises because potential purchasers of debt securities will not agree to pay face value for those securities if interest rates substantially increase, thereby affording potential purchasers more favorable rates on essentially equivalent securities. Accordingly, such investments would have to be held to maturity to avoid a potential loss. Concentration of Credit Risk - Credit risk can arise as a result of failure to adequately diversify investments. Concentration risk disclosure is required for positions of 5 percent or more in securities of a single issuer. Governmental Accounting Standards Board Statement No. 40 directs that deposits be disclosed as exposed to custodial credit risk if they are not covered by depository insurance, and the deposits are either: · Uncollateralized · Collateralized with securities held by the pledging financial institution, or · Collateralized with securities held by the pledging financial institution's trust department or agent but not in the Town's name At December 31, 2011 the Town's cash book balance was approximately $51,422,217. This amount is inclusive of Fiduciary fund deposits of $15,037,334 but exclusive of petty cash of $300. The available bank balance was $51,679,827. Of the bank balance, $6,074,033 was covered by Federal deposit insurance, and $58,826,717 was covered by collateral held by the Town's agent, a third-party financial institution, in the Town's name. The Town's $57,936 CLASS investment consists of U.S Treasury Obligations and repurchase agreements relating to Treasury obligations and is not subject to risk categorization. -32- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 C. DETAILED NOTES ON ALL FUNDS (continued) 1. CASH AND INVESTMENTS (continued) As of December 31,2011, the Town did not have any investments subject to credit risk, interest- rate risk or concentration of credit risk. The cash in the Community Preservation Fund is classified as restricted cash because its use is restricted by contractual agreements and regulations. 2. INTERFUND RECEIVABLES, PAYABLES AND TRANSFERS Interfund receivable and payable balances for the primary government at December 31, 2011 are expected to be paid currently. These balances represent various temporary loans, recharges, and reimbursements between funds and are stated as follows: Major Governmental Funds: General Fund - Town wide Highway Fund Capital Projects Fund Non-Major Governmental Funds: General Fund - Part Town Special Grant East-West Fire District Southold Wastewater District Fishers Island Sewer District Solid Waste Management District Amount Amount Receivable Payable $ 12,476 $ 2,890,552 1,438,917 4,000 229,606 12,474 224,182 12,533 223,570 30,501 6,300 728,941 Total $ 2.907.026 Interfund transfer balances for the primary government at December 31, 2011 represent primarily the payment of capital, and debt service expenditures and are stated as follows: Transfers Transfers In Out Major Governmental Funds: General Fund - Town wide Highway Fund Capital Projects Fund Non-Major Governmental Funds: Southold Wastewater District Solid Waste Management District $ 1,140,457 Total $ 1.140~457 $ $ 686,286 129,000 169,407 155,764 1.140~457 -33- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 DETAILED NOTES ON ALL FUNDS (continued) 3. CAPITAL ASSETS Capital asset activity for the year ended December 31,2011 are as follows: Primary qovernment Capital assets not being depreciated Land Land development rights Construction in progress Total capital assets not being depreciated Depreciable capital assets Buildings Improvements other than buildings Machinery and equipment Software Infrastructure Total depreciable capital assets Less accumulated depreciation Buildings Improvements other than buildings Machinery and equipment Software Infrastructure Total accumulated depreciation Total net depreciable capital assets Total net capital assets Balance 1/1/11 Additions Subtractions Balance 12/31/11 5,256,156 $ 1,378,975 100,094,235 7,521,817 1,337,090 418,786 $ 1,075,824 $ 6,635,131 107,616,052 660,052 1061687,481 9,319,578 1,075,824 114,931,235 12,759,942 10,890 15,410,764 290,528 10,661,595 492,960 567,152 175,346 73,594,619 1,780,731 390,571 12,770,832 15,701,292 10,763,984 742,498 75,375,350 112,994,072 2,750,455 390,571 115,353,956 3,460,195 351,156 4,715,002 591,287 7,879,094 661,958 535,884 43,645 58,820,002 2,734,671 378,607 3,811,351 5,306,289 8,162,445 579,529 61,554,673 $ 75,410,177 $ 4,382,717$ 378,607 $ 79,414,287 35,939,669 $ 150,870,904 Depreciation expense was charged to governmental functions as follows: General government support Public safety Transportation Economic assistance and opportunity Culture and recreation Home and community services $ 296,951 255,287 3,139,954 13,676 93,063 583,766 $ 4,382,717 The Town evaluates prominent events or changes in circumstances affecting capital assets to determine whether impairment of a capital asset has occurred. The Town's policy is to record an impairment loss in the period when the Town determines that the carrying amount of the asset wilt not be recoverable. At December 31,2011, the Town has not recorded any such impairment losses. -34- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 DETAILED NOTES ON ALL FUNDS (continued) 3. CAPITAL ASSETS (continued) Discretely presented component units Capital assets not being depreciated Land Construction in progress Total capital assets not being depreciated Depreciable capital assets Buildings Improvements other than buildings Machinery and equipment Infrastructum Total depreciable capital assets Less accureulated depreciation Buildings Improvements other than buildings Machinery and equipment Infrastructure Total accumulated depreciation Total net depreciable capital assets Total net capital assets Balance Balance 1/1/11 Additions Subtractions 12/31/11 $ 2,193,353 $ 2,193,353 92,382 $ 92,382 2,285,735 $ -0- 92,382 2,193,353 14,227,122 16,275 14,243,397 2,336,272 12,955 2,349,227 3,518,312 12,175 3,530,487 2,604,422 95,020 2,899,442 22,886,128 136,425 -0- 23,022,553 2,707,934 342,462 3,050,396 268,934 201,943 470,877 2,785,596 129,089 2,914,685 1,733,874 100,454 1,834,328 $ 7,496,338 $ 773,948 $ -0- 8,270,286 4. INDEBTEDNESS 14,752,267 $ 16,945,620 SHORT TERM DEBT Bond Anticipation Notes (BANs) - Bond anticipation notes (BANs) are used as a temporary means of financing capital expenditures in the Capital Projects Fund. State law requires that BANs issued for capital purposes be converted to long-term obligations within five years after the original issue date. The notes or renewal thereof may not extend more than two years beyond the original date of issue unless a portion is redeemed within two years and within each 12 month period thereafter. Liabilities for BANs are generally accounted for in the Capital Projects Fund. BANs are expected to be paid from the proceeds of future bond issues after renewal of these notes. These BANs bear interest at various rates from .74% to .89% and are due at various dates through 2012. Proceeds of notes which have been refinanced by the issuance of serial bonds subsequent to the end of the year but prior to dating of this financial statement are reported as a financing source in the appropriate fund. These notes are summarized as follows: Interest Description Amount Rate Various Purposes $ 1,135,000 Various Purposes 900,000 Various Purposes 307,000 Fishers Island Ferry Distrct 650,000 Total ~ -35- .74% .85% .89% .85% TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 DETAILED NOTES ON ALL FUNDS (continued) 4. INDEBTEDNESS (continued) SHORT TERM DEBT (continued) A summary of changes in short term BANs for the year ended December 31,2011 is as follows: Balance Balance 1/1/11 Increases Reductions 12/31/11 Primary Government $ 5,418,000 $ 1,330,000 $ 4,406,000 $ 2,342,000 Component Units (Unaudited) 800,000 150,000 650,000 $ 6.218.00~00 $ 1,330.000 $ 4,556.000 ~ LONG TERM DEBT General Obligation Bonds - The Town borrows money in order to acquire land, equipment or construct buildings and improvements. This enables the cost of these capital assets to be borne by the present and future taxpayers receiving the benefit of the capital assets. These long-term liabilities are backed by the full faith and credit of the Town, including bonds of the Town Special Districts which are payable for tax revenues of the areas benefits. Interest rates of these bonds vary from 2.00% to 5.00% and have maturity dates in 2012 through 2030. Future principal and interest payments to maturity for both the primary government component units are as follows: Year Endin~ Principal Interest Totals 2012 $ 2,655,000 $ 1,665,975 $ 4,320,975 2013 2,545,000 1,532,946 4,077,946 2014 2,575,000 1,452,968 4,027,968 2015 2,600,000 1,369,587 3,969,587 2016 2,560,000 1,284,704 3,844,704 2017-2021 12,070,000 5,049,068 17,119,068 2022-2026 10,755,000 2,927,269 13,682,269 2027-2030 8,625,000 791,728 9,416,728 Totals $ 44.385.00~00 ~ ~ and the The New York State Environmental Facilities Corporation (NYSEFC) completed a refinancing, of the EFC's bonds, which will reduce the Town's future interest cost for the Clean Water and Drinking of Water State Revolving Funds (SRF). The net present value of the savings is $8,212. There was no change to the principal amounts of the bonds. -36- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 DETAILED NOTES ON ALL FUNDS (continued) 4. INDEBTEDNESS (continued) CHANGES IN LONG-TERM LIABILITIES Long-term liability activity for the year ended December 31,2011 is as follows: Non-current liabilities Primary Government: Generalobligationbonds $ 31,300,000 $ 13,175,000 $ Due to Employees Retirement System 312,837 Net compensated absences 7,544,371 532,431 Claims and judgments 278,739 4,072,651 Estimated liability for landfill closure and post~losure care costs 993,336 Other postemployment benefits payable 13,707,939 6,895,930 Component Units: Bond anticipation notes 750,000 650,000 General obligation bonds 2,075,000 Net compensated absences 216,209 Other postemployment benefits payable 302,137 21,018 1,990,0OO $ 42,485,000 $ 2,480,000 71,928 240,909 589,511 7,487,291 90,000 3,055,055 1,296,335 1,296,335 $ 40,005,000 240,909 7,397,291 24,230 969,106 24,540 944,566 1,650,960 18,952,909 18,952,909 750,000 650,000 650,000 175,000 1,900,000 175,000 1,725,000 2,297 213,912 52,329 161,583 323,155 323,155 Liabilities for general obligation bonds, general liability claims and judgments and landfill closure and post closure care costs are liquidated through future budgetary appropriations in the General Fund. The liabilities for compensated absences, medical claims and judgments, other postemployment benefits, and due to Employees' Retirement System are liquidated through future budgetary appropriation in the fund that gave rise to the liability. RETIREMENT SYSTEM Plan Description The Town of Southold participates in the New York State and Local Employees' Retirement System (ERS) and Local Police and Fire Retirement System (PFRS). This is a cost-sharing multiple- employer retirement system. The System provides retirement benefits as well as death and disability benefits. Obligation of employers and employees to contribute and benefits to employees are governed by the New York State Retirement and Social Security Law (NYSRSSL). As set forth in the NYSRSSL, the Comptroller of the State of New York (Comptroller) serves as sole trustee and administrative head of the System. The Comptroller shall adopt and may amend rules and regulations for the administration and transaction of the business of the System and for the custody and control of their funds. The System issues a publicly available financial report that includes financial statements and required supplemental information. That report may be found at http://www.osc.state.ny.us/retire/pubtications/index.php or obtained by writing to the New York State and Local Retirement System, 110 State Street, Albany, NY 12244-0001. Fund n~ Policy The System is noncontributory except for employees who joined the New York State and Local Employees' Retirement System after July 27, 1976 who contribute 3% of their salary for the first ten years of membership and employees who joined on or after January 1, 2010 who generally contribute 3% of their salary for the entire length of service. Under the authority of the NYSRSSL, the Comptroller annually certifies the actuarially determined rates expressed as proportions of payroll members, used in computing the employers' contributions based on salaries paid during the System's fiscal year ending March 31. -37- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 DETAILED NOTES ON ALL FUNDS (continued) 5. RETIREMENT SYSTEM (continued) Fundinq Policy (continued) The Town is required to contribute at an actuarially determined rate. The actual contributions were equal to 100% of the actuarially required amounts and also include additional contributions to fund various early retirement incentives made available to the Town employees. The credits and miscellaneous adjustments represent modification made by the NYSERS to the prior year's contributions due to differences between estimated and actual salaries for the plan year. The required contributions, for the Town, for the current year and two preceding years were: ERS PFRS 2011 $ 1,827,936 $ 1,308,331 2010 1,265,284 957,407 2009 794,550 861,865 Pursuant to Chapter 105 of the Laws of 2010, the New York State Legislature authorized local governments to make available a retirement incentive program with estimated total costs to the Town of $312,837. The cost of the program is being billed and paid over five years beginning in 2012 and will include interest at 5.0%. Future principal and interest payments to maturity are as follows: Principal Interest Total Principal and Interest Foryears ending December31,2012 $ -0- $ ~0- $ -0- 2013 53,859 18,069 71,928 2014 57,899 14,029 71,928 2015 62,241 9,687 71,928 2016 66,910 5,018 71,928 Totals $ 240~909 $ 46.803 $ 287,712 6. OTHER POSTEMPLOYMENT BENEFITS (OBLIGATIONS FOR HEALTH INSURANCE) In the government-wide financial statements, the cost of postemployment healthcare benefits, like the cost of pension benefits, generally should be associated with the period in which the cost occurs, rather than in the future year when it will be paid. In adopting the requirements of GASB 45, during the year ended December 31, 2008, the Town recognizes the cost of post- employment healthcare in the year when the employee services are received reports the accumulated liability from prior years and provide information useful in assessing potential demands on the Town's future cash flows. Recognition of the liability accumulated from prior years will be phased in over 30 years, which commenced with the 2008 liability. -38- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 DETAILED NOTES ON ALL FUNDS (continued) OTHER POSTEMPLOYMENT BENEFITS (OBLIGATIONS FOR HEALTH INSURANCE) (continued) Plan Description: The Town, as a single-employer defined benefit OPEB plan, per its contracts with employees, will pay full premium costs for medical (currently provided by the Empire Plan and the Town's self- funded medical plan) insurance coverage at retirement. For non-police participants, the Town provides continuation of medical insurance to employees who retire under the NYS Retirement System or who are at least 55 years old and have 10 years of service with the Town. For police, the Town provides continuation of medical insurance for employees who have at least 20 years of service with the Town. The retiree and spouse are eligible for full Medicare premium reimbursement in the amount of $1,661 for police and $1,385 for others. Healthcare benefits for non-union employees are similar to those of union employees. Surviving spouses of deceased employees may continue coverage by paying the premium equivalent for participants. They are also entitled to Medicare part B premium reimbursement. The number of participants as of January 1, 2011, the effective date of the OPEB valuation is as follows. There have been no significant changes in the number or type of coverage since that date. Active em ployees 192 Retirees 208 Spouses of retired employees 5 Total 405 Fundinq Policy: The Town currently pays for postemployment health care benefits on a pay-as-you-go basis. Annual Other Postemployment Benefits Cost and Net Obligation: For the year ended December 31, 2011, the Town's annual other postemployment benefits cost (expenses) were $6,624,103. Considering the annual expense as well as the payment of current health insurance premiums, which totaled $1,650,960 for retirees and their beneficiaries, the result was an increase in the other postemployment benefits liability of $5,244,970 for the year ended December 31, 2011. The Town's component unit's annual other postemployment benefits cost (expenses) were $31,657. Considering the annual expense as well as the payment of current health insurance premiums, which totaled $10,639 for retirees, the result was an increase in the other postemployment benefits liability of $21,018 for the year ended December 31,2011. Benefit Obliqations and Normal Cost Retired employees $ 33,669,512 Active employees Unfunded actuarial accrued liability (UAAL) 40,697,296 $ 74.366.808 The Town's annual other postemployment benefit cost is calculated based on the annual required contribution (ARC) of the employer, an amount actuarially determined in accordance with the parameters of GASB Statement No. 45. The ARC represents a level of funding that, if paid on an ongoing basis, is projected to cover normal cost each year and amortize any unfunded actuarial liabilities (or funding excess) over a period not to exceed thirty years. -39- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 DETAILED NOTES ON ALL FUNDS (continued) 6. OTHER POSTEMPLOYMENT BENEFITS (OBLIGATIONS FOR HEALTH INSURANCE) (continued) Annual Other Postemployment Benefits Cost and Net Obliqation: (continued) The Town's annual other postemployment benefits cost, the amount actually paid and changes to the Town's net other postemployment benefits obligation to the Plan for the year ended December 31,2011 are as follows: Normal Cost Amortization of unfunded actuarial liability (UAAL) over 30 years Interest Annual required contribution (ARC) Interest on net other postemployment benefits obligation Adjustment to ARC Annual OPEB cost (expense) Less: contribution for year ended December 31,2011 Increase in net OPEB obligation Net OPEB obligation - beginning of year Net OPEB obligation - end of year Percent of annual OPEB cost contributed Funded Status and Fundin~q Pro~lress: $ 2,737,290 4,135,231 274,901 7,147,422 564,197 (815,689) 6,895,930 1,650,960 5,244,970 13,707,939 23.94% The percentage contributed, as it relates to the Town of Southold, for the current year and preceding year was: Annual Annual Contribution Percentage Net OPEB OPEB Cost Made Contributed Obliqation 2011 $ 6,895,930 $ 1,650,960 23.94% $ 18,952,909 2010 6,624,103 1,635,730 24.69% 13,707,939 2009 6,339,666 1,294,979 20.43% 8,719,566 The schedule of funding progress presents trend information about whether the actuarial value of plan assets is increasing or decreasing over time relative to the actuarial accrued liability for benefits. The funded status of the plan as of January 1,2011 is as follows: Town $ Component Units Actuarial Accrued Unfunded UAAL as a Percentage Value of Liability AAL Funded Covered of Assets (AALI (UAAL) Ratio Payroll Payroll -0- $ 74,366,808 $ 74,366,808 0% $13,634,750 545.42% ~- 422,080 422,080 0% 922,554 45.75% -40- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 DETAILED NOTES ON ALL FUNDS (continued) OTHER POSTEMPLOYMENT BENEFITS (OBLIGATIONS FOR HEALTH INSURANCE) (continued) Actuarial Methods and Assumptions: The projection of future benefits for an ongoing plan involves estimates of the value of reported amounts and assumptions about the probability of occurrence of future events far into the future. Amounts determined regarding the funded status of a plan and the employer's annual required contributions are subject to continual revision as actual results are compared with past expectations and new estimates are made about the future. Projections of benefits for financial reporting purposes are based on the substantive plan (the plan as understood by the employer and the plan members) and include the types of benefits provided at the time of each valuation and the historical pattern of sharing benefit costs between the employer and plan members to that point. The actuarial methods and assumptions used include techniques that are designed to reduce the effects of short-term liability in actuarial accrued liabilities, consistent with the long-term perspective of the calculations. In the January 1, 2011 actuarial valuation, the liabilities were computed using the projected unit credit cost method and the level dollar amortization method. The actuarial assumptions utilized a 4% discount rate. The valuation assumes a 10% healthcare cost trend increase for the year, reduced by decrements down to 5% in fiscal year 2016. The remaining amortization period at December 31,2011 was twenty six years. 7. COMPENSATED ABSENCES Town employees are granted vacation and sick leave and earn compensatory absences in varying amounts. In the event of termination or upon retirement, an employee is entitled to payment for accumulated vacation and sick leave and unused compensatory absences at various rates subject to certain maximum limitations. Estimated vacation, sick leave and compensatory absences accumulated by governmental fund type employees have been recorded in the statements of net assets. Payment of vacation time and sick leave is dependent upon many factors; therefore, timing of future payments is not readily determinable. However, management believes that sufficient resources will be made available for the payments of vacation, sick leave and compensatory absences when such payments become due. As of December 31,2011, the value of the accumulated vacation time and sick leave was $7,487,291 for the primary government. COMMITMENTS AND CONTINGENCIES Risk Management In common with other municipalities, the Town receives numerous notices of claims. The Town established a self-insurance risk management program for general liability and health insurance which are both accounted for in the Risk Retention Fund. For the year ended December 31, 2011, the Town has a deductible liability exposure of $50,000 per claim for General Liability, $25,000 per claim for Automobile Liability, Police Liability and Employee Benefits, and $10,000 per claim for Public Officials and Employment Practices. Any liability exposure above the deductible amounts is covered by primary insurance policies up to $1,000,000 per claim for General Liability, Public Officials, Police and Employment Practices, and Employee Benefits. Aggregate exposures are $1,000,000 per claim for Public Officials, Police and Employment Practices, $3,000,000 for Employee Benefits and General Liability. After primary policy limits are exhausted, the excess exposure above the per claim or aggregate limits is covered by an Umbrella Liability Policy of $10,000,000 per claim and $10,000,000 in the aggregate. -41- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 COMMITMENTS AND CONTINGENCIES (continued) Risk Management (continued) For insurance for health benefits that are self-insured, the Town has insurance policies which provide coverage for specific medical cases in excess of $100,000 incurred during the year and paid within three months after year end, as well as coverage for all other claims in the aggregate. The exposure to the Town under the aggregate policy is based on monthly enrollment. Considering the changes to enrollment during 2011, the attachment point for the aggregate policy was $4,045,385. There have been no significant reductions in insurance coverage as compared to the prior year, and there were no settlements in excess of insurance coverage over the last three years. The Risk Retention Fund reserves for general liability claims are determined by a third party administrator, and are reported when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Claims reserves for general liability claims are re-evaluated periodically to take into consideration recently settled claims and any new developments and changes. The Risk Retention Fund liabilities for medical claims outstanding at year end are reported by the third party administrator, and are recorded when it is probable that a loss has occurred and the amount of that loss can be reasonably estimated. Claims reserves for the general liability claims are re-evaluated periodically to take into consideration recently settled claims and any new developments and changes. The Risk Retention Fund liabilities for medial claims outstanding at year end are reported by the third party administrator and are recorded when the claim has been incurred and paid within 60 days of the year end. The Town's discretely presented component units are not included in the Town's self-insurance risk management program for any claims. Net assets in the Risk Retention Fund are reserved for future catastrophic losses and are not available for other uses. Changes in the liability for claims and judgments for the year ended December 31, 2011 and 2010 are as follows: General Medical Liability 2011 2010 2011 2010 Unpaid Claims as of December 31, prior year $ 272,213 $ 168,376 $ 6,526 $ 3,396 Incurred Claims: Provision for insured events of the current fiscal year Increase (decrease) in net provision for insured events of prior fiscal years Total Incurred Claims and Claim adjustments 4,041,144 3,021,789 4,684 25,000 (5,013) 8,075 (3,040) 9,656 4,036,131 3,029,864 8,170 38,052 Payments of: Claims during the current year 3,018,374 2,926,027 1,805 31,526 Unpaid Claims as of December 31, current year $ 1.289.97~0 ~ $ 6.365 $ 6~526 -42- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31,2011 COMMITMENTS AND CONTINGENCIES (continued) Landfill Closure and Post-Closure Care Costs State and federal laws and regulations required the Town to place a final cover on its landfill sites and to perform certain maintenance and monitoring functions at the sites for thirty years after closure. The Town ceased accepting waste at its Cutchogue landfill as of October 8, 1993. Accordingly, as of December 31, 2011 the Town has recorded a liability of $969,106, in the government-wide financial statements which represents the provision to be made in future budgets for unfunded closure and postclosure landfill costs. As the liability is based on 100% of capacity there are no estimated costs of closure or postclosure remaining to be recognized. Actual costs may vary due to inflation or deflation, changes in technology, or changes in regulations or applicable laws. Construction and Other Capital Acquisition Commitments The Town is committed to capital improvements to its various facilities and infrastructure. The Town at December 31, 2011 has funds restricted or assigned for capital acquisitions and improvements of $219,716 in the Capital Projects Fund. Animal Shelter Agreement In May 2011, the Town entered into an agreement with The North Fork Animal Welfare League to operate and manage the Town of Southold Animal Shelter. The agreement is for a term of four years commencing on June 1,2011. The future payments associated with this agreement are as follows: 2012 $ 208,588 2013 214,845 2014 217,484 2015 90,618 $ 731.535 Lease Commitments and Leased Assets The Town leases property and equipment under operating leases. Total rental expenditures on such leases for the year ended December 31, 2011 were $247,410. Future obligations over the primary terms of the Town's leases as of December 31,2011 are as follows: 2012 $ 229,742 2013 123,069 2014 95,349 2015 86,643 2016 and thereafter 234,072 Total $ 768.875 -43- TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 CONDENSED FINANCIAL STATEMENTS FOR THE DISCRETELY PRESENTED COMPONENT UNITS The following represents condensed financial statements for the discretely presented component units as of and for the year ended December 31,2011: Condensed Statement of Net Assets: Due from Capital Assets Other Current Primal, Net of Current Long-Term Net Assets Government Depreciation Liabilities Liabilities Assets Fishers Island Ferry Distdct $ 930,066 Fishers Isiand Waste Management District 930,983 Cutchogue-New Suffolk Park District (unaudited) 121,156 Southold Park District (unaudited) 58,190 Orient-East Marion Park Distdct (unaudited) 7,625 Mattituck Park District (unaudited) 465,661 Odent Mosquito District (unaudited) 6,633 $ 225,559 $ 11,099,901 $ 1,352,411 $ 2,209,738 $ 8,693,377 158,463 2,756,020 173,429 3,672,037 39,097 118,420 39,097 239,576 94,734 853,017 109,718 926,223 11,789 432,985 11,789 440,610 121,759 1,647,246 129,093 2,105,573 24,060 8,031 24,060 14,664 $ 2,520,314 $ 675,461 $ 16,945,620 $ 1,839,597 $ 2,209,738 $ 16,092,060 Program C-C-C-C-C-C-C-C-C-C~ e r al Rever~ue Net AsseM Properly Expenses Revenue Net E.xpense Tax Other Change 1/1111 12/31/11 Fishers Island Ferry Dietnct $ 3,654,576 $ 2,657,466 $ 997,110 $ 650,000 $ 196,283 $ (150,827) $ 8,8~4,204 $ 8,693,377 Fishers Island Waste Management Distdc~ 621,174 48,857 572,317 510r6~0 3,340 (52,317) 3,724,354 3,672,037 Cutchogue-New Suffolk Park District(unaudited) 118,668 115,668 130,000 691 12,023 227,553 239,576 Southold Park Distdct (uPaudited) 336,276 336,276 315,000 34,54t 13,265 912,958 926,223 Ofient-Eaet Madon Park DiMdct (unaudited) 34,801 34,801 34,250 2,428 1,877 438,733 440,610 Mat~tuck Park Distdct (unaudited) 34~,037 344,037 432,360 44,894 133,217 1,972,356 2,105,573 Odent Mosquito Oistdct (unaudited) 78,463 78,463 80,000 35 1,572 13,092 14,664 $ 5,187,995 $ 2,706,323 $ 2,481,672 $ 2,158,270 $ 282,212 $ (41,190) $ 15,133,250 $ 16,092,060 Complete financial statements of these component units can be obtained from their respective administrative offices: Orient Mosquito District 145 Platt Road Orient, NY 11957 Cutchogue-New Suffolk Park District P.O. Box 311 Cutchogue, NY 11935 Southold Park District P.O. Box 959 Southold, NY 11971 Fishers Island Ferry District P.O. Box 1179 Southold, NY 11971 Fishers Island Waste Management District Fishers Island, NY 06390 Orient-East Marion Park District P.O. Box 12 Orient, NY 11957 Mattituck Park District P.O. Box 1413 Mattituck, NY 11952 TOWN OF SOUTHOLD NOTES TO FINANCIAL STATEMENTS December 31, 2011 2% TRANSFER TAX In November 1998, the voters of the Town approved a referendum for a 2% transfer tax, which became effective on April 1, 1999. The transfer tax receipts are recorded in the Community Preservation Fund, and are used for the purchase and/or preservation of agricultural land, open space, parks, or historic preservation sites. The tax applies to sales of vacant land worth $100,000 or more or sales or improved land worth $250,000 or more. Conveyance of real property for open space, parks or historic preservation purposes are exempt from this tax. At December 31, 2011, and for the four previous years, the Town has the following 2% transfer tax revenue which was utilized for the conservation, environmental or historic preservation purposes expenses of: Revenues Expenditures Yearend December31,2011 $ 14,867,962 $ 10,025,132 2010 6,588,824 8,731,929 2009 3,040,294 4,599,624 2008 5,251,258 17,624,096 2007 6,071,436 2,423,659 SUBSEQUENT EVENTS In April 2012, the Town renewed a BAN in the amount of $715,000 at .40% paying $1,142,000 of an existing BAN in the amount of $1,857,000. In September 2012, the Town renewed a BAN in the amount of $800,000 at .50% paying $455,000 of an existing BAN in the amount of $1,135,000. On October 29, 2012, Hurricane Sandy made landfall on Long Island, affecting the Town of Southold. As of the date of this report, the Town's capital assets do not appear to be severely damaged or impaired, however there were additional expenditures which were incurred and will continue to be incurred, relating to the clean-up and the maintaining of public safety conditions in the Town. Management is not able to quantify the total costs of this storm at this time, however the Town will apply for Federal and/or State aid, as available, to assist with these costs. Based on past experience, aid has been made available to the Town for similar storm costs. NEW PRONOUNCEMENTS The Governmental Accounting Standards Board (GASB) has issued Statement No. 60 "Accounting and Financial Reporting for Service Concession Arrangements." This statement addresses how to account for and report service concession arrangements. The requirements of the new statement become effective for fiscal periods beginning after December 15, 2011. The Government Accounting Standards Board (GASB) has issued Statement No. 61 "The Financial Reporting Entity: Omnibus - an amendment of GASB Statement No, 14 and 34." This statement modifies certain requirements for inclusion of component units in the financial reporting entity. The requirements of the new statement become effective for fiscal periods beginning after June 15, 2012. The Governmental Accounting Standards Board (GASB) has issued Statement No. 63 "Financial Reporting of Deferred Outflows of Resources, Deferred Inflows of Resources, and Net Position." This statement is for presentation purposes only. The requirement of the new statement becomes effective for fiscal periods beginning after December 15, 2011. The Town is currently evaluating the impact of the above pronouncements. -45- REQUIRED SUPPLEMENTARY INFORMATION OTHER THAN MANAGEMENT DISCUSSION AND ANALYSIS TOWN OF SOUTHOLD GENERAL FUND SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCE - BUDGET AND ACTUAL Year ended December 31, 2011 REVENUES Real property taxes Other real property tax items Non-property tax items Departmental income Intergovernmental charges and local aid Use of money and property Licenses and permits Fines and forfeitures Sale of property and compensation for loss Miscellaneous local sources Interfund revenues State aid Federal aid Total Revenues EXPENDITURES General government support Public safety Public health Transportation Economic assistance and opportunity Culture and recreation Home and community services Employee benefits Debt service - principal and interest Total Expenditures Excess (Deficiency) of Revenues Over Expenditures Other Financing Uses Transfers out Total Other Financing Uses Net Change in Fund Balance Fund Balance at Beginning of Year Fund Balance at End of Year Variance Original Final Positive Budget Budget Actual ~ $21,734,453 $ 21,734,453 $ 21,734,453 84,000 84,000 85,765 $ 1,765 885,473 885,473 885,473 406,000 525,500 529,774 4,274 397,085 445,045 271,087 (173,958) 275,000 275,000 270,073 (4,927) 281,480 281,480 269,551 (11,929) 200,500 200,500 184,388 (16,112) 77,625 1,073,762 1,024,171 (49,591) 218,323 241,713 310,392 68,679 30,000 30,000 30,000 1,239,000 1,287,024 t,133,604 (153,420) 95,000 323,144 508,605 185,461 25,923,939 27,387,094 27,237,336 (149,758) 7,126,796 6,893,230 5,796,536 1,096,694 9,457,872 10,035,674 9,247,050 788,624 33,800 34,300 33,788 512 505,900 515,563 474,404 41,159 1,214,650 1,214,229 1,165,355 48,874 310,073 312,073 277,281 34,792 443,251 446,575 419,977 26,598 7,302,251 8,297,839 7,534,913 762,926 820,500 820,500 800,115 20,385 27,215,093 28,569,983 25,749,419 2,820,564 (1,291,154) (1,182,889) 1,487,917 2,670,806 (649,846) (759,073) (686,286) 72,787 (649,846) (759,073) (686,286) 72,787 $ (1,941,000) $ (1,941,962) 801,631 $ 2,743,593 7,423,101 $ 8,224,732 See notes to the financial statements. -46- TOWN OF SOUTHOLD HIGHWAY FUND SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL Year ended December 31,2011 REVENUES Real property taxes Other real property tax items Use of money and property Licenses and permits Sale of property and compensation for loss State aid Federal Aid Total Revenues Variance Original Final Positive Budget Budget Actual (Negative) $ 4,586,896 $ 4,586,896 $ 4,586,896 6,500 6,500 7,148 $ 648 6,000 6,000 6,583 583 4,000 4,000 10,410 6,410 30,000 30,000 9,950 (20,050) 326,819 363,736 416,217 52,481 128,287 240,253 111,966 4,960,215 5,125,419 5,277,457 152,038 EXPENDITURES General government support 7,100 Transportation 3,341,524 Employee benefits 1,612,226 Debt service - principal and interest 99,215 Total Expenditures Excess (Deficiency) of Revenues Over Expenditures Other Financing Uses Transfers out Total Other Financing Uses Net Change in Fund Balance Fund Balance at Beginning of Year Fund Balance at End of Year 7,100 6,283 817 3,517,178 3,175,948 341,230 1,612,226 1,517,515 94,711 99,215 96,657 2,558 5,060,065 5,235,719 4,796,403 439,316 (99,850) (110,300) 481,054 591,354 (129,000) (129,000) (129,000) -0- (129,000) (129,000) (129,000) -0- $ (228,850) $ (239,300) 352,054 $ 591,354 642,466 $ 994,520 See notes to the financial statements. ~47- TOWN OF SOUTHOLD COMMUNITY PRESERVATION FUND SCHEDULE OF REVENUES, EXPENDITURES, AND CHANGES IN FUND BALANCES - BUDGET AND ACTUAL Year ended December 3'1, 20'11 REVENUES Non-property tax items Use of money and property Miscellaneous local sources State aid Federal Aid Total Revenues EXPENDITURES Home and community services Debt service - principal and interest Total Expenditures Excess (Deficiency) of Revenues Over Expenditures Other Financing Sources Debt proceeds Total Other Financing Sources Net Change in Fund Balance Fund Balance at Beginning of Year Fund Balance at End of Year Variance Original Final Positive Budget Budget Actual (Negative) $ 2,860,000 $ 2,880,000 $ 3,570,355 $ 690,355 15,000 15,000 29,884 14,884 100 100 7,500 (7,500) 1,267,623 1,267,623 2,895,000 2,902,500 4,867,962 1,965,462 3,459,000 13,466,500 8,389,229 5,077,271 1,636,000 1,636,000 1,635,903 97 5,095,000 15,102,500 10,025,132 5,077,368 (2,200,000) (12,200,000) (5,157,170) 7,042,830 10,000,000 10,000,000 -0- 10,000,000 10,000,000 -0- $(2,200,000) $(2,200,000) 4,842,830 $ 7,042,830 6,002,350 $10,845,180. See notes to the financial statements. -48- TOWN OF SOUTHOLD POSTEMPLOYMENT BENEFITS HEALTHCARE COSTS - SCHEDULE OF FUNDING PROGRESS Year ended December 31,2011 Unfunded Liability as a Actuarial Actuarial Actuarial Percentage of Valuation Date Value of Accrued Unfunded Covered January 1, Assets Liability Liability Funded Ratio Covered Payroll Payroll 2011 $ -0- $ 74,366,808 $ 74,366,808 0.00% $13,634,750 545.42% 2010 -0- 66,597,849 66,597,849 0.00% 15,492,700 429.87% 2009 -0- 62,493,280 62,493,280 0.00% 14,754,952 423.54% 2008 -0- 45,806,258 45,806,258 0.00% 13,830,871 331.19% -49- OTHER SUPPLEMENTARY INFORMATION TOWN OF SOUTHOLD COMBINING BALANCE SHEET NON-MAJOR GOVERNMENTAL FUNDS December 31~ 2011 ASSETS Cash and investments Accounts receivable Due from other funds State and federal receivables Prepaids LIABILITIES AND FUND BALANCE LIABILITIES Accounts payable Deferred revenue FUND BALANCE Nonspendable Restricted Assigned Total Assets Total Liabilities Total Fund Balance Total Liabilities and Fund Balance General Fund Part Town $ 543,068 80,318 224,182 59,755 38,324 East-West Fire Southold Fishers Solid Waste Special Protection Wastewater Island Sewer Management Grant District District District District $ 23,798 $ 12,533 223,570 765 $ 945,647 $ 13,298 $ 247,368 $ 10,865 $ 3,315 $ 13,136 240,620 223,570 251,485 3,315 236,706 38,324 9,983 655,838 10,662 694,162 9,983 10,662 $ 945,647 $ 13,298 $ 247,368 $ 81,049 30,501 $ 111,550 $ 30,481 30,481 81,069 81,069 $ 111,550 $ 23,485 6,300 $ 29,785 $ 83 83 29,702 29,702 $ 29,785 $ 252,151 133,118 728,941 113,409 39,589 $ 1,267,208 $ 239,194 584,481 823,675 39,589 403,944 443,533 $ 1,267,208 Totals $ 923,551 213,436 1,226,027 173,929 77,913 $2,614,856 $ 266,593 1,079,152 1,345,745 77,913 9,983 1,181,215 1,269,111 $2,614,856 -50- TOWN OF SOUTHOLD COMBINING STATEMENT OF REVENUES, EXPENDITURES AND CHANGES IN FUND BALANCES - NON-MAJOR GOVERNMENTAL FUNDS For the year ended December 31, 2011 REVENUES Real property taxes Other real property tax items Non-property tax items Departmental income Use of money and property Licenses and permits Sale of property and compensation for loss Miscellaneous local sources State aid Federal aid EXPENDITURES General government support Public safety Home and community services Employee benefits Debt service: Principal Interest Excess (Deficiency) of Revenues Over Expenditures Other Financing Uses: Transfers out East-West Fire Southold General Fund Special Protection Wastewater Part Town Grant District District $ 783,364 $ 712,563 1,222 39 314,260 635,776 2,284 377 5,100 171 89,557 $ 9,983 112,145 Total Revenues 1,831,734 122,128 712,979 Total Expenditures Total Other Financing Uses Net Change in Fund Balance Fund Balances (Deficit) at Beginning of Year 51,506 574,841 642,698 568,933 1,837,978 (6,244) (6,244) 700,406 $ 694,162 Fund Balances at End of Year 112,145 112,145 9,983 9,983 $ 9,983 708,739 708,739 4,240 4,240 6,422 $ 10,662 Fishers Island Sewer District $ 8O5 $ 31,042 5O6 67 1,311 336 2,175 3,390 5,901 (4,590) (169,407) (169,407) (173,997) 255,066 $ 81,069 31,109 23,003 6,000 4,194 33,197 (2,088) (2,088) 31,790 $ 29,702 Solid Waste Management District $1,877,246 103 1,833,928 12,288 162,984 358,288 59,905 85,244 4,389,986 23,933 2,746,578 612,705 457,900 194,678 4,035,794 354,192 (155,764) (155,764) 198,428 245,105 $ 443,533 Totals $3,373,173 1,364 314,260 2,501,551 15,522 168,084 358,459 9,983 149,462 197,389 7,089,247 75,439 1,283,580 3,524,760 1,181,638 466,075 202,262 6,733,754 355,493 (325,171) (325,171) 30,322 1,238,789 $1,269,111 -51- DISCRETELY PRESENTED COMPONENT UNITS ASSETS Current Assets: Cash and investments Accounts receivable Due from primary government Prepaid charges Total Current Assets Non-Current Assets: Non-depreciable capital assets Depreciable capital assets, net of depreciation Total Non-Current Assets Total Assets LIABILITIES Current Liabilities: Accounts payable and accrued liabilities Accrued interest payable Bond anticipation notes payable Due to other governments Unearned revenue Non-current liabilities due within one year General obligation bonds payable Compensated absences payable Total Current Liabilities Non-Current Liabilities: General obligation bonds payable Compensated absences payable Other postemployment benefits payable Total Non-Current Liabilities Total Liabilities NET ASSETS Investment in capital assets, net of related debt Unrestricted Total Net Assets TOWN OF SOUTHOLD DISCRETELY PRESENTED COMPONENT UNITS COMBINING STATEMENT OF NET ASSETS December 31,2011 Fishers Fishers Island Cutchogue- Southold Orient-East Mattituck Orient Island Ferry Waste Management New Suffolk Park Marion Park Park Mosquito District District Park District District District District District (Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Totals $ 811,742 $ 919,959 $ 121,156 $ 58,190 $ 7,625 $ 465,661 $ 6,633 $ 2,390,966 44,813 835 45,648 225,559 158,463 39,097 94,734 11,789 121,759 24,060 675,461 73,511 10,189 83,700 1,155,625 1,089,446 160,253 152,924 19,414 587,420 30,693 3,195,775 41,717 517,262 101,198 588,849 432,985 511,342 2,193,353 11,058,184 2,238,758 17,222 294, t68 1,135,904 8,031 14,752,267 11,099,901 2,756,020 118,420 883,017 432,985 1,647,246 8,031 16,945,620 12,255,526 3,845,466 278,673 1,035,941 452,399 2,234,666 38,724 20,141,395 222,110 27,206 650,000 225,766 175,000 52,329 12,639 14,984 7,334 257,067 27,206 650,000 2,327 2,327 158,463 39,097 94,734 11,789 121,759 24,060 675,668 175,000 52,329 1,352,411 173,429 39,097 109,718 11,789 129,093 24,060 t,839,597 1,725,000 1,725,000 161,583 161,583 323,155 323,155 2,209,738 -0- -0- -0- -0- -0- -0- 2,209,738 3,562,149 173,429 39,097 109,718 11,789 129,093 24,060 4,049,335 8,549,901 2,756,020 912,960 1,647,246 13,866,127 143,476 916,017 239,576 13,263 440,610 458,327 14,664 2,225,933 $ 8,693,377 $ 3,672,037 $ 239,576 $ 926,223 $ 440,610 $ 2,105,573 $ 14,664 . $ 16,092,060 -52- TOWN OF SOUTHOLD DISCRETELY PRESENTED COMPONENT UNITS COMBINING STATEMENT OF ACTIVITIES Year ended December 31,2011 REVENUES Program revenues Real property taxes Other real property tax items Non-property tax items Interest earnings State Aid Federal Aid Other EXPENSES General government support Public health Transportation Culture and recreation Home and community services Interest on debt Changes in Net Assets Net Assets at Beginning of Year Fishers Fishers Island Cutchogue- Southold Orient-East Mattituck Odent Island Ferry Waste Managemenl New Suffolk Park Marion Park Park Mosquito District District Park District District District District District (Audited) (Audited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited) Totals $ 2,587,181 $ 48,857 $ 2,636,038 650,000 516,660 $ 130,000 $ 315,000 $ 34,250 $ 432,360 $ 80,000 2,158,270 36 28 7 17 2 24 4 118 1,757 3,312 684 694 91 3,630 31 10,199 5,763 5,763 64,522 64,522 194,490 33,830 2,335 41,240 271,895 3,503,749 568,857 130,691 349,541 36,678 477,254 80,035 5,146,805 233,147 233,147 78,463 78,463 3,323,353 3,323,353 14,992 118,668 336,276 34,801 343,842 848,579 621,174 621,174 83,084 195 83,279 3,654,576 621,174 118,668 336,276 34,801 344,037 78,463. 5,187,995 (150,827) (52,317) 12,023 13,265 1,877 133,217 1,572 (41,190) 8,844,204 3,724,354 227,553 912,958 438,733 1,972,356 13,092 16,133,250 Net Assets at End of Year $ 8,693,377 $ 3,672,037 $ 239,576 $ 926,223 $ 440,610 $ 2,105,573 $ 14,664 $16,092,060 -53- TOWN OF SOUTHOLD SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS Year ended December 31,2011 Federal GrantoflPass-through Grantor/ Proqram or Cluster Title U. S. Department of Housing and Urban Development Pass-through program from: Suffolk County, New York Community Development Block Grant Program U.S. Department of Health and Human Services Pass-through program from: Suffolk County, New York Special Programs for the Aging - Title III, Part C - Nutrition Nutrition Services Incentive Program Direct program from: Early Retiree Reinsurance Program U.S. Department of Transportation Pass-through program from: New York State Highway Planning and Construction Pass-through program from: New York State Selective Traffic Enforcement Program Pass-through program from: New York State Safety Incentive Grants for the Use of Seatbelts U.S. Department of Agriculture Direct program from: National Resource Conservation Service Farm and Ranchland Protection Program U.S. Department of the Interior Pass-through program from: New York State Clean Vessel Act U.S. Department of Justice Direct program from: Bulletproof Fest Partnership Program Pass - Federal Through CFDA Identifying Number Number 14.218 93.045 SCS10000001792 93.053 SCS10000001792 93.546 20.205 C022403/D030245 20.600 20.604 PT-5259081 10.913 15.616 16.607 Federal Expenditures $ 112,145 74,280 26,950 10,637 10,898 6,378 3,405 1,267,623 9,265 19,477 See accompanying notes to schedule of expenditures of federal awards -54- TOWN OF SOUTHOLD SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS December 31, 2011 U.S. Department of Homeland Security Pass-through program from: New York State Severe Storms and Flooding Severe Winter Storm, December 2010 Hurricane irene, August 2011 Pass-through program from: New York State and Suffolk County Homeland Security Grant Program Total expenditures of federal awards 97.036 97.036 97.036 97.067 FEMA-1899 DR-NY FEMA-1957-DR-NY FEMA-4020-DR-NY 31,302 331,374 303,176 6,960 See accompanying notes to schedule of expenditures of federal awards -55- TOWN OF SOUTHOLD NOTES TO SCHEDULE OF EXPENDITURES OF FEDERAL AWARDS December 31,2011 Note A - Basis of Presentation The accompanying schedule of expenditures of federal awards includes the federal grant activity of the Town of Southold and is presented on the modified accrual basis of accounting. The information in this schedule is presented in accordance with the requirements of OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Or~lanizations. Therefore, some amounts presented in this schedule may differ from amounts presented in, or used in the preparation of, the basic financial statements. Note B - Summary of Significant Accounting Policies (~) Expenditures reporLed on the Schedule are reported on the accrual basis of accounting. Such expenditures are recognized following the cost principles contained in OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments, wherein cedain types of expenditures are not allowable or are limited as to reimbursement. (2) Pass-through entity identifying numbers are presented where available. -56- CERTIFIED PUBLIC ACCOUNTANTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOV£RNMENTAUDITING STANDARDS Honorable Supervisor and Town Board Town of Southold Southold, New York We have audited the accompanying financial statements of the governmental activities, the discretely presented component unit, each major fund, and the aggregate remaining fund information of Town of Southold, New York, as of and for the year ended December 31,2011, which collectively comprise the Town of Southold, New York's basic financial statements and have issued our report thereon dated December 4, 2012. We conducted our audit in accordance with auditing standards generally accepted in the United States of America and the standards applicable to financial audits contained in Government Auditing Standards, issued by the Comptroller General of the United States. The financial statements of the Town of Southold's discretely presented component units with the exception of two, the Fishers Island Ferry District and the Fishers Island Waste Management District, were not audited as of the report date, nor were we able to satisf7 ourselves as to those financial activities by other auditing procedures. The discretely presented component units audited represent 79.9%, 76.8%, and 79.1%, respectively, of the assets, net assets, and revenues of the aggregate discretely presented component units. The financial statements of the Fishers Island Ferry District and the Fishers Island Waste Management District were audited by other auditors whose report thereon have been furnished to us and in our opinion, insofar as it relates to the amounts included for those two component units, are based solely on the reports of other auditors. The financial statements of the Fishers Island Ferry District and the Fishers Island Waste Management District were audited in accordance with Government Auditing Standards. Internal Control Over Financial Reportin~l In planning and performing our audit, we considered Town of Southold, New York's internal control over financial repor[ing as a basis for designing our auditing procedures for the purpose of expressing our opinions on the financial statements, but not for the purpose of expressing an opinion on the effectiveness of the Town of Southold, New York's internal control over financial reporting. Accordingly, we do not express an opinion on the effectiveness of the Town of Southold, New York's internal control over financial reporting. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct misstatements on a timely basis. A material weakness is a deficiency, or a combination of deficiencies, in internal control such that there is a reasonable possibility that a material misstatement of the entity's financial statements will not be prevented, or detected and corrected on a timely basis. PERSONAL SERVICE. TRUSTED ADVICE. ALBRECHT, VIGGIANO, ZURECK & COMPANY, PC 245 PARK AVENUE, 24TH FLOOR 25 SUFFOLK COURT NEW YORK, NY 10167 HAUPPAUGE, NY11788 3715 T: 212 7~)2.4075 T. 6314249500 F:631 4349518 www avz corn Internal Control Over Financial Reportinq (continued) Our consideration of internal control over financial reporting was for the limited purpose described in the first paragraph of this section and was not designed to identify all deficiencies in internal control over financial reporting that might be deficiencies, significant deficiencies, or material weaknesses. We did not identify any deficiencies in internal control over financial reporting that we consider to be material weaknesses, as defined above. However, we identified certain deficiencies in internal control over financial reporting, described in the accompanying schedule of findings and questioned costs as 2011-01 and 2011-02 that we consider to be significant deficiencies in internal control over financial reporting. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control that is less severe than a material weakness, yet important enough to merit attention by those charged with governance. Compliance and Other Matters As part of obtaining reasonable assurance about whether the Town of Southold, New York's financial statements are free of material misstatement, we performed tests of its compliance with certain provisions of laws, regulations, contracts, and grant agreements, noncompliance with which could have a direct and material effect on the determination of financial statement amounts. However, providing an opinion on compliance with those provisions was not an objective of our audit, and accordingly, we do not express such an opinion. The results of our tests disclosed no instances of noncompliance or other matters that are required to be reported under Government Auditin~l Standards. We noted certain other matters that we reported to management of the Town of Southold in a separate letter dated December 4, 2012. This report is intended solely for the information and use of management, Town Board, federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Hauppauge, New York December 4, 2012 -58- CERTIFIED PUBLIC ACCOUNTANTS INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WiTH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND INTERNAL CONTROL OVER COMPLIANCE IN ACCORDANCE WITH OMB CIRCULAR A-133 Honorable Supervisor and Town Board Town of Southold Southold, New York Compliance We have audited the compliance of Town of Southold, New York's, compliance with the types of compliance requirements described in the U.S. Office of Management and Budget (OMB) Circular A-133 Compliance Supplement that could have a direct and material effect on the Town of Southold, New York's major federal program for the year ended December 31,2011. Town of Southold, New York's major federal program is identified in the summary of auditors' results section of the accompanying schedule of findings and questioned costs. Compliance with the requirements of laws, regulations, contracts, and grants applicable to its major federal programs is the responsibility of Town of Southold, New York's management. Our responsibility is to express an opinion on Town of Southold, New York's compliance based on our audit. We conducted our audit of compliance in accordance with auditing standards generally accepted in the United States of America; the standards applicable to financial audits contained in Government Auditin~l Standards, issued by the Comptroller General of the United States; and OMB Circular A-133, Audits of States, Local Governments, and Non-Profit Organizations. Those standards and OMB Circular A-133 require that we plan and perform the audit to obtain reasonable assurance about whether noncompliance with the types of compliance requirements referred to above that could have a direct and material effect on a major federal program occurred. An audit includes examining, on a test basis, evidence about Town of Southold, New York's compliance with those requirements and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Our audit does not provide a legal determination of Town of Southold, New York's compliance with those requirements. in our opinion, the Town of Southold, New York, complied, in all material respects, with the requirements referred to above that could have a direct and material effect on its major federal programs for the year ended December 31, 2011. However, the results of our auditing procedures disclosed instanced of noncompliance with those requirements, which are required to be reported in accordance with OMB Circular A-133 and which are described in the accompanying schedule of findings and questioned costs as items 2011-03 and 2011-04. PERSONAL SERVICE. TRUSTED ADVICE. ALBRECHT, VIGGIANO, ZURECK & COMPANY, PC 245 PARK AVENUE, 24TH FLOOR 25 SUFFOLK COURT NEWYORK, NY 10167 HAUPPAUGE, NY 11788 3715 T: 212 792 4075 T: 631 434 9500 F: 631 434 9518 www avz corn 4 · Internal Controls Over Compliance Management of Town of Southold, New York, is responsible for establishing and maintaining effective internal control over compliance with the requirements of laws, regulations, contracts, and grants applicable to federal programs. In planning and performing our audit, we considered the Town of Southold, New York's internal control over compliance with the requirements that could have a direct and material effect on a major federal program to determine the auditing procedures for the purpose of expressing our opinion on compliance and to test and report on internal control over compliance in accordance with OMB Circular A-133, but not for the purpose of expressing an opinion on the effectiveness of internal control over compliance. Accordingly, we do not express an opinion on the effectiveness of the Town of Southold, New York's internal control over compliance. Our consideration of internal control over compliance was for the limited purpose described in the preceding paragraph and was not designed to identify all deficiencies in internal control over compliance that might be significant deficiencies or material weaknesses and therefore, there can be no assurance that all deficiencies, significant deficiencies, or material weaknesses have been identified. However, as discussed below, we identified certain deficiencies in internal control over compliance that we consider to be material weaknesses and other deficiencies that we consider to be significant deficiencies. A deficiency in internal control over compliance exists when the design or operation of a control over compliance does not allow management or employees, in the normal course of performing their assigned functions, to prevent, or detect and correct, noncompliance with a type of compliance requirement of a federal program on a timely basis. A material weakness in internal control ever compliance is a deficiency, or combination of deficiencies, in internal control over compliance, such that there is a reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as item 2011-04 to be a material weakness. A significant deficiency in internal control over compliance is a deficiency or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance. We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as items 2011-03 to be a significant deficiency. The Town of Southold, New York's response to the findings identified in our audit are described in the accompanying schedule of findings and questioned costs. We did not audit the Town of Southold, New York's response, and, accordingly, we express no opinion on the response. This report is intended solely for the information and use of management, Town Board, others within the Town, federal awarding agencies and pass-through entities and is not intended to be and should not be used by anyone other than these specified parties. Hauppauge, New York December 4, 2012 -60- TOWN OF SOUTHOLD SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year ended December 31,2011 SUMMARY OF AUDITORS' RESULTS 1. The auditors' report expresses a qualified opinion on the basic financial statements of the Town of Southeld. Two significant deficiencies in internal control relating to the audit of the financial statements are reported in the "REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING AND ON COMPLIANCE AND OTHER MATTERS BASED ON AN AUDIT OF FINANCIAL STATEMENTS PERFORMED IN ACCORDANCE WITH GOVERNMENTAUDITING STANDARDS". 3. No instances of noncompliance material to the financial statements of the Town of Southold were disclosed during the audit. Two control deficiencies relating to the audit of the major federal award program are reported in the "INDEPENDENT AUDITORS' REPORT ON COMPLIANCE WITH REQUIREMENTS THAT COULD HAVE A DIRECT AND MATERIAL EFFECT ON EACH MAJOR PROGRAM AND ON INTERNAL CONTROL OVER COMPLANCE IN ACCORDANCE WITH OMB CIRCULAR A-133". One of these deficiencies is reported as a material weakness. 5, The auditors' report on compliance for the major federal awards programs for the Town of Southold expresses an unqualified opinion on all major federal programs. 6, There were no audit findings that are required to be reported in accordance with Section 510(a) of OMB Circular A-133. 7. The programs tested major programs were: CFDA Number Name of Federal Proqram or Cluster 10.913 97.036 Farm and Ranchland Protection Program Disaster Grants 8. The threshold for distinguishing Types A and B programs was $300,000. 9. The Town of Southold was not determined to be a Iow-risk auditee. -61- TOWN OF SOUTHOLD SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year ended December 31,2011 FINDINGS AND QUESTIONED COSTS - FINANCIAL STATEMENTS AUDIT 2011-01 RECEIVER OF TAXES - SEGREGATION OF DUTIES (REPEAT FINDING) Condition We noted that the Receiver of Taxes is the only authorized check signer, prepares the deposit slips, brings the deposit to the bank, receives the bank statements, and reconciles the bank accounts. Criteria Internal controls should be in place to provide for segregation of duties within accounting functions relating to cash receipts, check signing and bank reconciliations to reduce the risk of potential errors and fraud. Effect Intentional or unintentional errors could be made and not detected. Recommendation We recommend that the Receiver of Taxes separates these duties relating to the cash receipts and reconciliation cycle to another employee so that no one person handles all elements of a single transaction. We recommend that the Receiver of Taxes duties of preparing the bank deposit, depositing the funds and reconciling the bank statement be assigned to some other employee in order to establish a proper segregation of duties over cash receipts. Manaqement's Response Due to the small size of the Tax Receiver's office, certain functions have been separated to alleviate the segregation of duties condition. The Tax Receiver is in the process of training the Deputy Tax Receiver in the preparation of the bank reconciliations. The Deputy Tax Receiver will also receive the bank statements directly and then subsequently prepare the monthly bank reconciliations. 2011-02 PURCHASING AND PROCUREMENT Condition New York State General Municipal Law requires purchases of similar items to be aggregated to determine if they meet the threshold for formal competitive bidding or required price quotes. Although the Town has a system in place to provide accurate historical information to be used to estimate future purchases, during the course of the audit, we noted several instances where several departments did not obtain and/or retain verbal or written quotes as required by the Town's adopted Procurement Policy. In addition, there was no evidence that these departments had secured quotes to document that it was receiving the lowest price for goods or services purchased. We also noted several instances where the Town did not go out to bid on cedain purchases exceeding the competitive bidding limits for expenditures incurred by the Buildings and Grounds, Highway, Solid Waste and Public Works departments, tn addition, we noted several instances where sole source or the respective NYS or Suffolk County contract numbers were not properly documented on the purchase order. It was also noted that purchase orders were not in place in one instance where required as per the Town's adopted Procurement Policy. In addition, we noted several instances where the purchase order was dated subsequent to the vendor invoice. Criteria New York State General Municipal Law requires purchases of similar items to be aggregated to determine if they meet the threshold for formal competitive bidding or required price quotes. -62- TOWN OF SOUTHOLD SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year ended December 31,2011 FINDINGS AND QUESTIONED COSTS - FINANCIAL STATEMENTS AUDIT (continued) 2011-02 PURCHASING AND PROCUREMENT (continued) Effect The Town may violate both general municipal law and the Town's adopted procurement policy. Recommendation We recommend that the Board ensure that these departments are complying with Board adopted policies and the requirements of General Municipal Law. We further recommend that to properly document such compliance, the departments should solicit and retain competitive quotations gathered from a sufficient number of vendors, as required by the policy and attach all documentation to the completed voucher packet, in instances where the vendor utilized is a sole source provider, or under a NYS or Suffolk County contract, documentation of such should be noted on the respective purchase order. We also recommend that purchase orders are in place in all instances where required as per the Town's adopted Procurement Policy. Manaqement's Response The Town is working to put a procedure in place to monitor the aggregation of purchases of similar type items. In addition, the Town has enforced their procurement policy to the various departments to obtain quotes for items exceeding the Town's policy limits and to better document on the voucher packet exception items to the procurement policy (i.e. emergency repair, sole source provider). FINDINGS AND QUESTIONED COSTS - MAJOR FEDERAL AWARD PROGRAMS 2011-03 PROCUREMENT, SUSPENSION, AND DEBARMENT Federal Proqram Disaster Grants - CFDA Number 97.036 Criteria Per OMB Circular Compliance Supplement it indicates that local governments are required to follow their own procurement procedures provided they are in compliance with General Municipal Law guidelines. In addition, non-federal entities are prohibited from contracting with or making sub awards to parties that are suspended or debarred. Suspension and debarment are monitored through the EPLS (Excluded Parties List Systems) website. Condition We noted one instance where items that should have been public bid in accordance with the Town's procurement policy. Effect The Town may violate both general municipal law and the Town's adopted procurement policy. -63- TOWN OF SOUTHOLD SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year ended December 31,2011 FINDINGS AND QUESTIONED COSTS - MAJOR FEDERAL AWARD PROGRAMS (continued) 2011-03 PROCUREMENT, SUSPENSION, AND DEBARMENT (continued) Recommendation We recommend the Board ensures that the departments who contract with federal funds are complying with Board adopted policies and the requirements of General Municipal Law. Management's Response The Town will closely monitor the departments receiving federal funds to ensure they are complying with the Town's adopted procurement policy. 2011-04 FILING DEADLINES FOR AUDITED FINANCIAL STATEMENTS - Material Weakness Federal ProRram Farm and Ranch Lands Protection Program -CFDA Number 10.913 Disaster Grants - CFDA Number 97.036 Criteria OMB Circular A-133 at Section 320(a) states that the reporting package (which includes the audit reports) must be submitted no later than 30 days after the reports are received from the independent auditors but no later than nine months after the end of the audit period. The Federal Audit Clearinghouse considers the submission requirement complete when it has received both the data collection form and the reporting package electronically. Condition The Town did not meet the required September 30, 2012 filing deadline for the audited financial statements due to the incomplete audit of the one of the Town's component units, Fishers Island Ferry District. Effect The Town is not in compliance with OMB Circular A-133 requirements. Recommendation We recommend that going forward the Town communicates a strict deadline to its component units to submit their audited financial statements so that they may be included in the Town's audit report so the Town can file timely. Manaqement's Response Due to the turnover at the Fishers Island Ferry District, the audit was unable to be completed timely and therefore delaying the filing of the Town's single audit. The Town has communicated this issue to the management of the Fishers Island Ferry District and they are working on a solution to ensure that future audits are completed by a particular date in order for the Town to fire their single audit report by the filing deadline of September 30th. -64- TOWN OF SOUTHOLD SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year ended December 31,2011 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS FINDINGS - FINANCIAL STATEMENTS AUDIT 2010-01 RECEIVER OF TAXES - SEGREGATION OF DUTIES Condition We noted that the Receiver of Taxes is the only authorized check signer, prepares the deposit slips, brings the deposit to the bank, receives the bank statements, and reconciles the bank accounts. Criteria Internal controls should be in place to provide for segregation of duties within accounting functions relating to cash receipts, check signing and bank reconciliations to reduce the risk of potential errors and fraud. Effect Intentional or unintentional errors could be made and not detected. Recommendation We recommend that the Receiver of Taxes separates these duties relating to the cash receipts and reconciliation cycle to another employee so that no one person handles all elements of a single transaction. We recommend that the Receiver of Taxes duties of preparing the bank deposit, depositing the funds and reconciling the bank statement be assigned to some other employee in order to establish a proper segregation of duties over cash receipts. Manaqement's Response Due to the small size of the Tax Receivers office, the Tax Receiver will evaluate the functions in his department and segregate the duties as best as possible given the small size of his staff. Current Status There has been no change noted for the year ended December 31,2011. The Tax Receiver is in the process of training the Deputy Tax Receiver in the preparation of the bank reconciliations. The Deputy Tax Receiver will also receive the bank statements directly and then subsequently prepare the monthly bank reconciliations. 2010-02 TOWN CLERK - SEGREGATION OF DUTIES Condition We noted that the Deputy Town Clerk counts the cash, prepares the deposit slips, brings the deposits to the bank, posts the cash receipts into the system, receives and reconciles the bank accounts. Criteria Internal controls should be in place to provide for segregation of duties within accounting functions relating to cash receipts, cash depositing and bank reconciliations to reduce the risk of potential errors and fraud. Effect Intentionat or unintentional errors could be made and not detected. Recommendation We recommend that the Deputy Town Clerk separates these duties relating to the cash receipts and reconciliation cycle to another employee so that no one person handles all elements of a single transaction. We recommend that the Deputy Town Clerk's duties of preparing the bank deposit, depositing the funds and reconciling the bank statement be assigned to some other employee in order to establish a proper segregation of duties over cash receipts. -65- TOWN OF SOUTHOLD SCHEDULE OF FINDINGS AND QUESTIONED COSTS Year ended December 31, 2011 SUMMARY SCHEDULE OF PRIOR AUDIT FINDINGS {continued) FINDINGS - FINANCIAL STATEMENTS AUDIT (continued) 2010-02 TOWN CLERK - SEGREGATION OF DUTIES (continued) Manaqement's Response The Southold Town Clerk's Office is a small office with only four clerks who are responsible for certain areas of expertise. They all wait on the counter and issue permits, licenses, and receive money in order to provide the best service possible to our constituents. The Town Clerk's office will address and create financial segregation of duties and develop written policies outlining those functions. Current Status This matter has been resolved by the Town. -66- CERTIFIED PUBLrC ACCOUNTANTS To the Town Board Town of Southold Southold, New York , I-f We have audited the financial statements of the governmental activities, each major fund, and the aggregate remaining fund information of the Town of Southold for the year ended December 31,2011, and have issued our report thereon dated December 4, 2012. Professional standards require that we provide you with information about our responsibilities under generally accepted auditing standards, Government Auditing Standards, OMB Circular A-133, as well as certain information related to the planned scope and timing of our audit. We have communicated such information to you in our letter dated August 3, 2011. Professional standards also require that we communicate to you the following information related to our audit. Significant Audit Findings Qualitative Aspects of Accounting Practices Management is responsible for the selection and use of appropriate accounting policies. The significant accounting policies used by the Town of Southold are described in Note A to the financial statements. One new accounting pronouncement was adopted during the year, GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions" which establishes criteria for classifying fund balances into specifically defined classifications and clarifies definitions for governmental fund types. We noted no instances entered into by the governmental unit during the year for which there is a lack of authoritative guidance or consensus. All significant transactions have been recognized in the financial statements in the proper period. Accounting estimates are an integral part of the financial statements prepared by management and are based on management's knowledge and experience about past and current events and assumptions about future events. Certain accounting estimates are particularly sensitive because of their significance to the financial statements and because of the possibility that future events affecting them may differ significantly than those expected. The most sensitive estimates affecting the financial statements were: Management's estimate of depreciation expense of $4,382,717 is based on the estimation of the useful lives of the fixed assets determined by the Town. We evaluated the key factors and assumptions used to develop the depreciation expense in determining that it is reasonable in relation to the financial statements taken as a whole. Management's estimate of the compensated absences liability of $7,487,291 is based on what the Town will be expected to pay in vacation and sick time when an employee terminates their employment with the Town. We evaluated the key factors and assumptions used to develop the compensated absences liability in determining that it is reasonable in relation to the financial statements taken as a whole. PERSONAL SERVICE.TRUSTED ADVICE. · ALBRECHT, VIGGIANO, ZURECK & COMPANY, PC. 245 PARK AVENUE, 24TH FLOOR 25 SUFFOLK COURT NEW YORK, NY 10167 HAUPPAUGE, NY11788 3715 T:212792.4075 T:831.4349500 F:831.4349518 www.avz co~r~ Town Board Town of Southold Page 2 Management's estimate for landfill closure and post-closure care costs of $969,106 is based on what the Town expects to pay for the monitoring and maintenance costs of their landfill over thirty years based on an estimate provided by engineers. We evaluated the key factors and assumptions used to develop the landfill closure and post-closure care costs in determining that it is reasonable in relation to the financial statements taken as a whole. Management's estimate of other post-employment benefits payable of $18,952,909 and the unfunded actuarial accrued liability of $74,366,808 is based on what the Town expects to pay in medical insurance costs and benefits to retired employees currently and over the next thirty years, respectively, based on certain assumptions provided by an actuary. We evaluated the key factors and assumptions used to develop the other post-employment benefits liability in determining that it is reasonable in relation to the financial statements taken as a whole. Difficulties Encountered in Performing the Audit We encountered no significant difficulties in dealing with management in performing and completing our audit. Corrected and Uncorrected Misstatements Professional standards require us to accumulate all known and likely misstatements identified during the audit, other than those that are trivial, and communicate them to appropriate level of management. The attached schedule summarizes uncorrected misstatements of the financial statements. Management has determined that their effects are immaterial, both individually and in the aggregate, to the financial statements taken as a whole. Disagreements with Management For purposes of this letter, a disagreement with management is a financial accounting, reporting, or auditing matter, whether or not resolved to our satisfaction, that could be significant to the financial statements or the auditor's report. We are pleased to report that no such disagreements arose during the course of our audit. Management Representations We have requested certain representations from management that are included in the management representation letter dated December 4, 2012. Management Consultations with Other Independent Accountants In some cases, management may decide to consult with other accountants about auditing and accounting matters, similar to obtaining a "second opinion" on certain situations. If a consultation involves application of an accounting principle to the Town's financial statements or a determination of the type of auditor's opinion that may be expressed on those statements, our professional standards require the consulting accountant to check with us to determine that the consultant has all the relevant facts. To our knowledge, there were no such consultations with other accountants. Town Board Town of Southold Page 3 Other Audit Findings or Issues We generally discuss a variety of matters, including the application of accounting principles and auditing standards, with management each year prior to retention as the Town's auditors. However, these discussions occurred in the normal course of our professional relationship and our responses were not a condition to our retention. Other Information in Documents Containin.q Audited Financial Statements With respect to the supplementary information accompanying the financial statements, we made certain inquiries of management and evaluated the form, content, and methods of preparing the information to determine that the information complies with accounting principles generally accepted in the United States of America, the method of preparing it has not changed from the prior period, and the information is appropriate and complete in relation to our audit of the financial statements. We compared and reconciled the supplementary information to the underlying accounting records used to prepare the financial statements or to the financial statements themselves. This information is intended solely for the use of the Town Board and management of Town of Southold and is not intended to be and should not be used by anyone other than these specified parties. Very truly yours, Albrecht, Viggiano, Zureck & Co., P.C. Hauppauge, New York December 4, 2012 Town of Southold Passed Adjustments 12/31/2011 Government Wide Financial Statements Net Assets Prepaid Expenses Debit Credit 555,673 555,673 To adjust for overaccrual of NYSERS prepaid expenses in the prior year. General Fund (A) Accrued Salaries Personal Services 103,278 103,278 To adjust for overaccruat of PBA retroactie pay increases for 2010 and 2011 Highway Fund (DB) Federal Aid 2,365 Federal Aid Receivable 2,365 To adjust for the overaccrual of FEMA funds due to revised reimbursements requests. CERTIFIED PUBLIC ACCOUNTANTS December 4, 2012 Honorable Supervisor and Town Board Town of Southold Southold, IVew York In planning and performing our audit of the financial statements of the Town of Southold (the "Town"} for the year ended December 31, 2011, we considered the Town's internal control in order to determine our auditing procedures for the purpose of expressing an opinion on the financial statements and not to provide assurance on internal control. However, during the audit we became aware of several matters that are opportunities for strengthening internal controls and operating efficiency. The memorandum that accompanies this letter summarizes our comments and suggestions regarding those matters. A separate report dated December 4, 2012 contains our report on significant deficiencies in the Town's internal control. This letter does not affect our report, dated December 4, 2012 on the financial statements of the Town of Southold. The accompanying memorandum is intended solely for the information and use of the Town of Southold, management, and others within the administration and is not intended to be and should not be used. by anyone other than these specified parties. We will review the status of these comments during our next engagement. We have already discussed many of these comments and suggestions with various Town personnel, and we will be pleased to discuss them in further detail at your convenience, perform any additional study of these matters, or assist you in implementing the recommendations. Very truly yours, aE ~ , P. La Albrecht, Viggiano, Zureck & Company, P.C. - PERSONAL SERVICE.TRUSTEDADVICE. ALBRECHT, VIGGIANO, ZURECK & COMPANY, P.C. 245 PARK AVENUE, 24TH FLOOR 25 SUFFOLK COURT NEW YORK, NY 10167 HAUPPAUGE, NY 11788-3715 T: 212.792.4075 T: 631.434.9500 F: 631.434.9518 www.avz.com INDEPENDENT MEMBER OF BKR INTERNATIONAL Town of Southold December 4, 2012 Page 2 JUSTICE COURT -STALE DATED CHECKS (REPEAT FINDING) Observation During our audit, we noted that certain outstanding checks for Justice Court accounts were more than one year old. Recommendation To aid in the preparation of bank reconciliations and to reflect an accurate cash balance in the financial statements, all checks outstanding more than six months old should be investigated and written-off as and disposed of in accordance with NYS Comptroller guidance. JUSTICE COURT REPORT FILINGS (REPEAT FINDING) Observation During our audit of the Justice Court, we noted that four reports were filed late with the NYS Comptroller's Office. According to the Office of the New York State Comptroller's Handbook for Town and Vil/age Justices and Court Clerks, "Reports are due between the 15~ and the 10th of the month, for every month that you hold office. Reports that are received after the 10t" of the month are considered late even if they are mailed on or before the 10th of the month. Reports that are received prior to the 15t are premature and may be incomplete if additional cases were heard during that month and were not included in the report." Recommendation The Justice Court should report to Office of the New York State Comptroller timely. JUSTICE COURT BANK RECONCILING ITEMS Observation During our audit of the Justice Court, we noted that there were certain reconciling items on the bank reconciliation that were not be followed up and adjusted timely and appropriately. Recommendation To aid in the preparation of bank reconciliations and to reflect proper cash balances, all reconciling items should be followed up monthly and adjusted accordingly. JUSTICE COURT PENDING CASES Observation During our audit of the Justice Court, it was determined that in accordance with the Office of the New York State Comptroller's Handbook for Town and Village Justices and Court Clerks, the Town had a large number of pending cases, including cases there were over 90 days. Recommendation We recommend that the Justice Court review the pending cases to the TSLED report and close down cases when necessary. Beginning in 2012, the Justice Court now has the ability to suspend licenses electronically and has recently begun to clear their pending cases. LANDFILL- DEPOSIT BAGS {REPEAT FINDING) Observation During our audit, we noted that the Friday deposits and other weekend shifts are left in the safe until Monday. All scale operators have access to the safe. It was noted that during the weekend, the scale operators will occasionally make change with these deposits. Recommendation We recommend increasing the amount of cash in the drawers thus eliminating the need for the scale operators to access the cash in the safe. The deposits from Friday should be deposited or locked in the safe in the office with limited access to certain individuals in order to ensure these deposits are protected against theft or loss. LANDFILL -REVIEW OF VOID REPORTS Observation During our audit, we noted that there are no formal procedures in place to review void reports which are generated as a result of incorrect weight, anon-chargeable item such as leaf disposal, etc. Recommendation We recommend the Department Head reviews and approve all void reports in order to ensure that the void activity for the day is accurate and reasonable. CAPITAL PROJECTS AUTHORIZATION (REPEAT FINDING) Observation During our audit, we noted that in one instance funds were committed through purchase orders for a capital project which had not yet been authorized by the Town Board. As a result, projects may occur without the knowledge and authorization of the Town Board and the Comptroller's office. Without knowledge of all capital projects, required funding may not be available and expenditures cannot be controlled. Recommendation We recommend that all capital projects expenditures be monitored to ensure that the authorization is in place before funds are committed and expended. LOG-INS AND PASSWORDS (REPEAT FINDING) Observation The Town currently does not require that user passwords be changed on a regular basis due to limitations in IT personnel and shared directories being maintained on the IBM servers. Due to the two types of servers being utilized and two different types of operating systems, this would currently be cumbersome and labor intensive for the limited IT staff. Recommendation We recommend that the IT department review the possibility of requiring that passwords be changed on a regular basis, in order to reduce the risk of access to computer files by unauthorized personnel. Security could be improved if an "intruder lockout" feature were added to the network so that three or more incorrect log in attempts would suspend the users account. The IT department would then be required to reset the account. In May 2012, with the help of IBM, the Town implemented Kerberos which enables password compatibility and consistency between IBM and Windows platforms. Now that this protocol is in place, the Town plans to implement a network password change requirement twice per year. SEGREGATION OF DUTIES -PROCEDURES OVER MEDICAL CLAIMS PROCESSED BY THE SERVICE ORGANIZATION Observation During our audit, we noted that the Comptroller handles all the phases over the procedures in processing the medical claims by Island Group Administration including approving the claims for payment, transferring the cash, and reconciling the bank account. Recommendation We recommend that another employee in the Comptroller's office reviews and approves the claims for payment before the funds are sent to Island Group Administration for payment.